Microeconomics, part 2- Production, Cost and Revenue Flashcards

1
Q

Law of diminishing marginal returns definition:

A

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

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2
Q

In the cost curve envelope, which law affects the SRAC curves?

A

Law of diminishing marginal returns

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3
Q

In the cost curve envelope, which law affects the LRAC curve?

A

Economies of scale

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4
Q

Why do short run average costs begin to rise?

A

The law of diminishing marginal returns

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5
Q

Why do long run costs begin to rise?

A

Diseconomies of scale

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6
Q

Increasing returns to scale definition:

A

Where an increase in factor inputs leads to a more than proportional increase in factor outputs

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7
Q

Constant returns to scale definition:

A

When an increase in factor inputs leads to a proportionate increase in factor outputs

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8
Q

Decreasing returns to scale definition:

A

When an increase in factor inputs leads to a less than proportionate increase in factor outputs

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9
Q

Minimum efficient scale (MES) definition:

A

The first/lowest point of output at which productive efficiency occurs

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10
Q

Technological change definition:

A

A term that is used to describe the overall effect of invention, innovation and the diffusion and spread of technology in the economy.

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11
Q

Invention definition:

A

Making something completely new; something that did not exist before at all

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12
Q

Innovation definition:

A

Improves and or makes a significant contribution to something that has already been invented, thereby turning the results of invention into a product

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13
Q

What are the effects of technological change on methods of production?

A
  • Move from labour intensive to capital intensive
  • Increase in mechanisation and automation
  • Requires more resources
  • Requires investment
  • Less labour but more skilled labour
  • Specialisation
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14
Q

What are the effects of technological change on the costs of production?

A
  • 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
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15
Q

What can technological change do?

A
  • Lead to the development of new products
  • Lead to the development of new markets
  • May destroy existing markets
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16
Q

Creative destruction definition:

A

Capitalism evolving and renewing itself over time through technologies and innovations replacing older technologies and innovations

17
Q

Why can technological change lead to more concentrated markets?

A

The start up costs are so high and require large amounts of investment so only large companies can do it

18
Q

Why can technological change lead to more competitive markets?

A

Sometimes barriers to entry can be lower. For example, the internet has lead to no need for a shop front

19
Q

What is the demand curve like for a perfectly competitive firm and what does it equal?

A

-Horizontal line

D=P=AR=MR

20
Q

What is the demand curve like for a monopoly and what does it equal?

A
  • Downward slope

- D=P=AR

21
Q

Why is the marginal revenue falling for a monopoly?

A

For the average to be falling, the marginal must be below it

22
Q

What does the total revenue curve look like?

A

Curve that goes up and then down a bit (n)

23
Q

When does total revenue start to fall?

A

When the marginal revenue is below 0. A loss is being made

24
Q

When is revenue maximised?

A

When MR=0

25
Q

Normal profit definition:

A

The minimum profit a firm must make to stay in business , which is, however insufficient to attract new firms into the market

26
Q

Why do economists include opportunity cost when working out a firm’s normal profit?

A

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

27
Q

Supernormal profit definition:

A

Profit over and above normal profit. Also known as above normal profit and abnormal profit.

28
Q

What’s the difference between returns to scale and economies of scale?

A
  • 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