mid term Flashcards
definition of production
process of using factors of production to produce good and services, where input (the 4) is transformed into outputs (goods & services)
definition of short run
- at least one input is fixed factor (others r variable)
definition of long run
all inputs are variable factors
(longer time period, able to adjust cost as they make adjustments to production)
define law of diminishing return
defn:
- when increasing quantity of variable factor is added to fixed factor, the total output will increase at increasing rate until a certain level of production
- then, total output will increase at a decreasing rate
- meaning marginal product is falling
- only used in short run (at least 1 fixed factor)
explain law of diminishing returns in a table (3 stages)
(1) increasing returns
- at the start, variable factor is added to fixed factor
- marginal product increases, sloping upwards (in table, MP reaches max value, draw a line below it - most optimal point)
- total product increases at increasing rate
- MP is above AP
reason: both fixed and variable factors r being used in better proportions
(2) diminishing returns
- more variable factor is added to the fixed factor
- MP is falling
- total product increases at decreasing rate (in table - TP reaches max value, draw line below the 2nd number)
- MP is below AP
reason: fixed input used in smaller quantity to work the increasing variable input
(3) negative returns
- MP is negative
- TP reached max level, stops increasing, then declines
reason: overcrowding; firms will never operate at this stage
how to calculate explicit cost? (aka direct cost)
- direct payment made by producer for factors of production
- cost incurred when producing G&S
- used for accounting profit
accounting profit= total revenue (p x q) - explicit costs
how to calculate implicit cost?
- cost incurred by producer for using factors of production that belongs to himself
- takes opportunity cost to estimate value of implicit cost (trade-offs, what could’ve been earned)
- used by economists
economic profit = total revenue - explicit cost - implicit cost
what is total fixed cost (TFC)?
- overhead costs in only in short run
- remains constant even if zero output
eg: rent
graph: horizontal straight line
what is total variable cost (TVC)?
- cost for variable input
- cost of input change with output
graph: inverse s-shaped curve
how to calculate total cost (TC)?
short run:
total cost= total fixed cost + total variable cost
long run:
total cost = total variable cost
graph: inverse s-shaped curve
how to calculate average fixed cost (AFC)?
- fixed cost per unit
- AFC will continue to decline with output in short run
graph: hyperbola
average fixed cost = total fixed costs/quantity
how to calculate average variable cost
- variable cost per unit of output
- AVC declines at first, then reaches minimum then increases continuously with output
graph: u-shaped
average variable cost = total variable cost/quantity
how to calculate average cost (AC)?
- cost per unit of output
- AC declines at first, then reaches minimum then increases continuously with output
graph: u-shaped
average cost= total cost/quantity
how to calculate marginal cost (MC)?
- additional cost incurred in producing an additional unit of output
- MC declines at first, then reaches minimum then increases continuously with output
graph: u-shaped
marginal cost = difference of total costs/difference of quantity
what is economies of scale?
benefits & advantages of large scale production
- increasing returns
- decreasing cost
explain internal economies
benefits enjoyed by the firm itself
- average cost declining as output increases (EOS)
- graph: LRAC is downward slopping
> mention movement, LRAC decreases from Co to C1, output increases from Q0 to Q1
> movement on curve, point downwards from a to b
explain the reasons for internal economies of scale
(1) marketing economies
- buy raw materials in bulk
- save unit cost from advertising & packaging
- hv their own sales department
- sell to large qnt to local & foreign market
(2) financial economies
- borrow large amt of $ at lower interest rate cuz sound financial standing
- low cost
- longer maturity period
- no collateral security required
(3) managerial economies
- specialisation of labour
- productivity increases
- lower cost of production
(4) technical economies
- technological improvement
- buy machine that r modern & advanced
- produces at max capacity
- reducing average cost
explain external economies of scale
benefits enjoyed by the entire industry
- average cost of production declining
graph: LRAC curve shifts downwards
> movement, moves from LRAC0 to LRAC1
> at output, LRAC falls from C0 to C1
> reason, due to changes outside the firm
explain the reasons for external economies of scale
(1) economies of concentration
- operate in same area, no need to advertise location (save advertising costs)
- ensures steady flow of demand
- attracts skilled workers & better infrastructure (save fixed costs)
(2) economies of information
- firms cooperate w e/o, set up research facilities & journal publications
- new & info, improve productivity, save costs
(3) economies of marketing
- cooperate w e/o to buy raw materials in bulk
- cheaper price, reduce cost of production
what is diseconomies of scale?
disadvantages of large scale production
- declining returns & increasing cost
explain internal diseconomies of scale
problems faced by the firm itself
- average cost is increasing
graph: LRAC sloping upwards
> LRAC increases as output increases**
> mention movement, LRAC increases from C0 to C1, output increases from Q0 to Q1
> movement on curve, point upwards from b to c
explain the reasons for internal diseconomies of scale
(1) labour diseconomies
- divide labour, work is boring & repetitive
- causes disinterest & reduced productivity
- eventually cost per unit will rise
(2) management problems
- difficult to coordinate large firms
- slower process of decision making
- lower output & higher costs
(3) technical difficulties
- over usage of machine lead to breakdown
- need to repair & replace increases costs
explain external diseconomies of scale
problems faced by the entire industry
- AC is increasing
graph: LRAC is moves upwards
> LRAC is increasing as production increases
> movement, shift upwards from LRAC0 to LRAC1
> at output, LRAC rises from C0 to C1
reason: changes outside the firm
explain the reasons for external diseconomies of scale
(1) concentration problem
- operate same area, traffic congestion when transport goods
- delayed productivity
- increases cost of goods
(2) scarcity problem
- competition among firms to obtain raw materials
- lead to higher demand, increasing prices
- increase cost of production
(3) wage problem
- shortage of skilled worker
- pay higher wages to attract/retain talent
- higher cost
define perfect competition
market w large number of seller & buyer, sell & buy identical (homogenous) goods; eg veggie and fruits
5 characteristics of perfectly competitive market
(1) large no. seller & buyer
- S or B x influence market price cuz transaction too small
- market price determined by market mechanism
- S & B are price taker
(2) identical goods
- x variation, x differentiate
- x need advertising
(3) freely enter or exit market
- x restrictions to new firms to enter
- exit any time
(4) perfect knowledge
- both S & B have, eg know current price & where to buy
- S x charge higher price cuz B hv perfect knowledge and x buy
(5) perfect mobility of factors of production
- factors of production move from one firm to another without restrictions
what is monopoly?
market with only one single seller and has no substitute, entry of other firm is restricted; eg: Tenaga Nasional Berhad
4 characteristics of monopoly
(1) one seller, large no. buyer
- monopoly seller determines price = price maker
- assumption: only control price or quantity, not both
(2) no close substitution
- B x obtain same or similar product from any S
- no competition
(3) barriers to entry
- strict restrictions to entry of new firms
- given exclusive rights by gov or ownership/control of raw materials
(4) advertising
- x necessary cuz public knows where to obtain
explain the reasons for monopoly
(1) monopoly resources
- only owner of key resource
- ownership & control
- discourage other firm to join
(2) gov regulation
- give a single firm exclusive rights to produce & sell a good
- done in public interest to increase public welfare
- enforces patent & copyright law
(3) production process (natural monopoly)
- more efficient for a single firm to provide a G or S at a lower cost
- due to nature of production (high costs)
- benefit from EOS, only one firm needed to produce entire output
what is monopolistic competition?
market that has many S & B that sell & buy close substitute products
- slight variation (packaging, design, quality)
eg: toothpaste, cup noodle, chocolate
4 characteristics of monopolistic competition
(1) many seller & buyer
- large no., but not as big as perfect competition
- no individual firm can influence market price
- output produced by each firm contributes small portion of whole market
- practice independent price-output policy
(2) close substitutes
- products are slightly different from e/o
eg: quality, packaging, design
- consumer preferences & customer loyalty
(3) non-price competition
- advertisement, promotion, free gift
- advertising super important to introduce new products to B
- to attract B & create brand loyalty
(4) no barriers to entry & exit
- x restrictions to enter or exit
- encourages firms to be innovative & create new products
what is oligopoly?
market w few large firms
- each firm able to influence market price by its own action
- products can be homogenous or differentiated
4 characteristics of oligopoly market
(1) few sellers
- few seller but firm is ** large**
- actions of one firm can influence market
(2) products r homogenous or differentiated
- homogenous: steel, cement
- differentiated: automobile, cigarette
(3) mutual interdependence
- firms consider action of other firms when making decisions
- tendency to follow price reduction but not price increases
(4) barriers to entry
- EOS has been established, sell goods at lower price compared to rival (discouraged from entering)
- high cost of production for advertising campaign
- difficulty providing extensive service network (eg car, TV set)
- ady have variation of product line
5 reasons for difference in wages
(1) education level
- higher tertiary education (uni degree, master qualification) are more knowledgeable & skillful
- opportunity cost to obtain education, money could’ve earned
(2) skill level
- high demand for skilled workers, but limited supply (surgeon)
- higher productivity, generate high output per worker
(3) revenue creation
- able to generate high revenue
- high efficiency
(4) work environment
- high pay for risk-taking, poor condition, unsocial hours as reward (miners)
(5) trade union protection
- trade union acts on behalf to protect from power of employer
- low pay cuz x trade union (agricultural sector, fishermen & farmers)
