Mod 3 - Short & Long Run Cont... Flashcards
What is the law of diminishing returns?
Let’s say one factor in production (for example labour) is increased when all other factors (like machines, workspace) are held constant, then eventually the out put per unit will decrease. A cafe cannot keep adding workers because eventually they will have nothing to do.
What is the difference between diseconomies of scale and law of diminishing returns?
Diminishing returns is the short run, because in the long run all factors are variable.
Diseconomies of scale are concerned with the long run.
For graph see ex 6
What is allocative efficiency?
Are the right products produced in the right quantity?
Where a market produces only the goods and services that are most desirable in society and inn high demand.
It occurs when marginal benefit is equal to marginal cost.
It is the efficient allocation of labour, machinery and other inputs that satisfy consumer wants best.
See 1b graph
What is productive efficiency? Sometimes known as technical - are the goods being produced at minimal cost?
Is a situation where a given quantity of a good or service is produced using the LEAST amount of inputs possible. This leads to cost minimisation.
The lowest cost methods are being used, think of Holden’s being produced on assembly lines! they were producing many with less inputs.
Each firm must be on the lowest possible AC curve, and at the minimum point of that curve , the MC curve intersects the AC curve see graph 1a
What is dynamic efficiency?
Developing the most efficient production techniques over time. They have to develop and utilise technological innovation to adopt their product quickly to changes in consumer tastes and preferences.
Must adjust to changes in demand, in resources and technology.
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What is dis-economy of scale?
This is where the expansion of a firm may give rise to diseconomies of scale and result in higher per unit costs.
Rather than continued decreasing costs as the out put increases, marginal cost increases.
See graph 7
Competing buyers and sellers in resource and product markets will have to determine these 4 things?
What to produce?
How much to produce?
How to produce them?
For whom to produce?
Firms are motivated to seek profits and avoid losses.
Economic costs?
Payments made to obtain and retain the services of resources including land, labour,capital and entrepreneurial Ability
Normal profits?
The minimum payment that is just sufficient to obtain and retain the contribution by the entrepreneur
Economic profits entice new firms to what?
Enter the insulted resulting in expansion.
This in turn increases market supply of the product, resulting in lower prices until normal profits are restored.
Declining profit will force firms to what?
Exit the industry,, resulting in a declining industry.
As firms exit, supply decreases and prices increase until normal profits are restored,
