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Business Economics > Output and Costs > Flashcards

Output and Costs Flashcards

1
Q

What are decision time frames?

A

They affect how reversible/irreversible a decision is

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2
Q

What are short run decisions?

A

A time frame in which the quantity of at least one factor of production is fixed, the fixed FOPs are the firm’s plant - this is fixed in the short run

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3
Q

How can firms increase output in the short run?

A

A firm must increase the quantity of a variable FOP which is usually labour

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4
Q

How reversible/irreversible are short run decisions?

A

They are easily reversed as the firm can increase/decrease output through varying the amount of labour it hires

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5
Q

What are long run decisions?

A

The long run is a time frame in which the quantities of all FOPs can be varied. The firm can change its plan.

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6
Q

How can firms increase output in the long run?

A

A firm can change its plant as well as the quantity of labour

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7
Q

How reversible/irreversible are long run decisions?

A

Long run decisions are not easily reversed, the decisions have to stick for a period of time.

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8
Q

Which costs do and don’t influence a firm’s decisions?

A

The short run costs of changing labour inputs and the short run costs of changing plants are the only ones that influence decisions. Sunk costs do not

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9
Q

What are sunk costs?

A

Past expenditure on plant that has no resale value is a sunk cost. They are irrelevant to current decisions.

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10
Q

What are product schedules?

A

Total product, marginal product and average product

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11
Q

What is total product?

A

The maximum output that a given quantity of labour can produce

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12
Q

What is the marginal product of labour?

A

The increase in total product that results from a one unit increase in the quantity of labour employed, with all other inputs remaining the same

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13
Q

What is average product?

A

It tells us how productive workers are on average. The average product of labour is equal to total product divided by the quantity of labour employed.

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14
Q

What are product curves?

A

Graphs of the relationship between employment and the three product concepts. They show how TP, MP and AP change as employment changes

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15
Q

What does a total product curve look like?

A

Labour on x axis, output on y axis, points marking attainable and unattainable output levels at different amounts of workers

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16
Q

What does a marginal product curve look like?

A

Labour on x axis, output on y axis, has a bar chart with a line marking over it, MP is the midway between the quantities of labour to show that it results from changing quantities of labour

17
Q

How does the total product curve affect the marginal product curve?

A

The steeper the slope of the TPC, the larger the marginal product. It can be measured by the slope of the TPC.

18
Q

What are increasing marginal returns?

A

Increasing marginal returns occurs when the marginal product of an additional worker exceeds the marginal product of the previous worker, they arise from specialisation and division of labour

19
Q

What are diminishing marginal returns?

A

The concept whereby firms eventually lose the value of additional labour after benefiting from increasing marginal returns

20
Q

Why do diminishing returns arise?

A

They arise from the fact that more workers are using the same capital and are using the same space so there is less to do per worker

21
Q

When do diminishing returns occur?

A

Diminishing returns occur when the MP of an additional worker is less than the MP of the previous worker

22
Q

What is the law of diminishing returns?

A

As a firm uses more of a variable factor of production with a given quantity of a fixed factor of production, the marginal product of the variable factor eventually diminishes

23
Q

How does the average product curve relate to the marginal product curve?

A

Marginal product initially exceeds average product but eventually they equalise, and in turn marginal product becomes less than average product

24
Q

Where does marginal product cut the average product curve?

A

At the point of maximum average product

25
Q

How do we know when average product is increasing?

A

When marginal product exceeds average product

26
Q

What is total cost?

A

The cost of all the FOPs a firm uses, they are separated into variable and fixed.

27
Q

What is total fixed cost?

A

The cost of the firm’s fixed factors, they do not change as output increases

28
Q

What is total variable cost?

A

The cost of the firm’s variable factors, they change as output changes

29
Q

What is marginal cost?

A

The increase in total cost that results from a one unit increase in output, it is calculated as the increase in total cost divided by the increase in output

30
Q

Why is the marginal cost curve u shaped?

A

Because when a second worker is hired, MC decreases, but when it hires a third, a fourth and a fifth, mc successively increases

31
Q

Why does mc decrease initially at small outputs?

A

Due to greater specialisation and division of labour

32
Q

Why does mc eventually increase at larger outputs?

A

Due to diminishing marginal returns, the output of each additional worker is successively smaller and to produce an additional unit of output, ever more workers are required and the cos t of of producing that unit (MC) increases

33
Q

What is the difference between average fixed cost, average variable cost and average total cost?

A

AFC is the total fixed cost per unit of output. AVC is the total variable cost per unit of output. ATC is the total cost per unit of output.

34
Q

How are the average costs calculated?

A

Dividing total cost components by quantity.

TC/Q TFC/Q TVC/Q

35
Q

What to the average costs look like on a graph?

A

The ATC and AVC curves are u shaped. The vertical distance between the ATC and the AVC = FC. The distance shrinks as output increases because AFC declines with increasing output.

36
Q

Where does the MC curve intersect the AVC curve and the ATC curve?

A

At their minimum points

37
Q

What is the relationship between the average cost and the marginal cost?

A

When MC is less than AC, AC is decreasing, and when MC exceeds AC, AC is increasing

Business Economics (14 decks)

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