Microeconomics, Part 3- Production, Costs and Revenue Flashcards
Division of labour definition:
Breaking down the production process down into a sequence of tasks, with workers assigned to particular tasks.
Specialisation definition:
A worker only performing one task or a narrow range of tasks. Also different firms specialising in producing different goods or services.
What does the division of labour and specialisation to do the PPF?
Increases it
Labour productivity definition:
Measures the output per worker or per hour worked. Labour productivity = total output per time period / number of units of labour
How can productivity be improved?
- Machinery
- Investment in capital
- Higher wages
- Training
- Education
Fixed costs definition:
Cost which does not change WITH OUTPUT, in the short run (i.e. even if nothing is produced, it must still be paid. For example rent
Variable costs definition:
Cost which changes proportionately with output
Total cost definition:
Fixed costs + variable costs
Average cost:
Total cost / output
What does the graph for average cost look like?
U
The lowest point is productively efficient because it is working at lowest average cost
Economies of scale definition:
As the scale of production of a firm increases, the long run average costs fall
Long run definition:
All factors of production are variable (including premises)
Short run definition:
At least one factor of production (usually land) remains fixed
Internal economies of scale definition:
Cost savings that result from the growth of the firm itself
Examples of internal economies of scale:
- Research and development
- Financial (Investors and banks are more likely to lend you money)
- Marketing
- Technical (Machines and factories)
- Managerial (more experienced and skilled workers)
- Purchasing (bulk buying)
External economies of scale definition:
Cost saving resulting from the growth of the industry or market of which the firm is a part of
Examples of external economies of scale:
- Research and development by the government
- Transport
- Infrastructure
- Improved education
Diseconomies of scale definition:
Where an increase in the scale of production leads to increases in average total costs for firms
What do diseconomies of scale arise from?
- Managerial diseconomies of scale (more difficult to manage)
- Communication failure
- Motivational diseconomies of scale (people aren’t as motivated because the firm has grown)
Examples of external diseconomies of scale:
- Congestion
- Pollution
What does the average cost graph for internal and external diseconomies of scale look like?
Average cost curve
- Economies of scale: Moves from the left hand side towards the right but not over half way (not past productive efficiency)
- Diseconomies of scale: On the right hand side
What does the average cost curve for external economies and diseconomies of scale look like
The cost curve shifts up (diseconomies) or down (economies)
What kind of firms have a downwards sloping cost curve?
Very large businesses. The fixed costs are so high that the variable costs are negligible and don’t have any effect on the average cost, so each additional unit sold decreases the average cost. It never reaches productive efficiency.
