Microeconomics, part 2- Production, Cost and Revenue Flashcards
Law of diminishing marginal returns definition:
A short term law which states that as a variable factor of production is added to a fixed factor of production, eventually both the marginal and average returns to the variable factor will begin to fall.
Total output is still increasing but at a diminished rate
In the cost curve envelope, which law affects the SRAC curves?
Law of diminishing marginal returns
In the cost curve envelope, which law affects the LRAC curve?
Economies of scale
Why do short run average costs begin to rise?
The law of diminishing marginal returns
Why do long run costs begin to rise?
Diseconomies of scale
Increasing returns to scale definition:
Where an increase in factor inputs leads to a more than proportional increase in factor outputs
Constant returns to scale definition:
When an increase in factor inputs leads to a proportionate increase in factor outputs
Decreasing returns to scale definition:
When an increase in factor inputs leads to a less than proportionate increase in factor outputs
Minimum efficient scale (MES) definition:
The first/lowest point of output at which productive efficiency occurs
Technological change definition:
A term that is used to describe the overall effect of invention, innovation and the diffusion and spread of technology in the economy.
Invention definition:
Making something completely new; something that did not exist before at all
Innovation definition:
Improves and or makes a significant contribution to something that has already been invented, thereby turning the results of invention into a product
What are the effects of technological change on methods of production?
- Move from labour intensive to capital intensive
- Increase in mechanisation and automation
- Requires more resources
- Requires investment
- Less labour but more skilled labour
- Specialisation
What are the effects of technological change on the costs of production?
- Lowers cost curve envelope (LRAC), because of external economies of scale
- Shift along the LRAC curve because of internal economies of scale
- Fixed costs will rise but average fixed costs will eventually fall
What can technological change do?
- Lead to the development of new products
- Lead to the development of new markets
- May destroy existing markets
Creative destruction definition:
Capitalism evolving and renewing itself over time through technologies and innovations replacing older technologies and innovations
Why can technological change lead to more concentrated markets?
The start up costs are so high and require large amounts of investment so only large companies can do it
Why can technological change lead to more competitive markets?
Sometimes barriers to entry can be lower. For example, the internet has lead to no need for a shop front
What is the demand curve like for a perfectly competitive firm and what does it equal?
-Horizontal line
D=P=AR=MR
What is the demand curve like for a monopoly and what does it equal?
- Downward slope
- D=P=AR
Why is the marginal revenue falling for a monopoly?
For the average to be falling, the marginal must be below it
What does the total revenue curve look like?
Curve that goes up and then down a bit (n)
When does total revenue start to fall?
When the marginal revenue is below 0. A loss is being made
When is revenue maximised?
When MR=0
Normal profit definition:
The minimum profit a firm must make to stay in business , which is, however insufficient to attract new firms into the market
Why do economists include opportunity cost when working out a firm’s normal profit?
Because it is a cost. If the opportunity costs were greater than the money made, a rational entrepreneur would leave the market. Therefore the revenue covers the physical costs of production as well as the opportunity costs
Supernormal profit definition:
Profit over and above normal profit. Also known as above normal profit and abnormal profit.
What’s the difference between returns to scale and economies of scale?
- Returns to scale describe how much output changes as input is increased
- Economies of scale describe how reductions in average cost occur as output is increased
