Production Flashcards
What are the assumptions that economists make about production?
No buyer or seller in the market is big enough to influence the market price
Sellers in the market produce identical goods
There is free entry and exit in the market
The goal of a seller is to maximise profits - what are three problems that they face?
1) how to make the product
2) what is the cost of making the product?
3) how much can the seller get for the product in the market?
What is the production function?
What are the two types of inputs?
Fixed Factors of Production: Inputs that cannot be changed in the short term and stay the same regardless of how much output is produced
Variable Factors of Production: Inputs that change with the amount of production
What is the difference between the short-run and the long-run?
In the short run, some assets are fixed
- The timeframe of the short run is how long it take to get rid of your fixed inputs
In the long run we assume that there are no fixed assets
- All inputs are able to be changed in this period
- These will vary from firm to firm/industry to industry
What is marginal productivity, and how can it be calculated?
The marginal product is the additional output that is generated from an additional unit of input
It can be calculated by dividing the change in quantity by the change in labour
What is the law of diminishing marginal productivity?
As you increase the amount of variable inputs, without increasing the fixed inputs, output will increase, but at a decreasing rate
What are the potential stages of marginal productivity?
Marginal product can increase with early workers, because it allows for:
- Specialisation (the efficient division of duties)
- Learning from other employees
However, at some point, each additional worker begins to contribute less output than the worker before
- This is because of the limitations of fixed inputs, which must be shared amongst more and more workers, decreasing their efficiency
At an extreme point, marginal product can be negative
- This is when the amount of workers becomes so inefficient as to start creating negative outcomes for the business
What are the two types of costs of production?
How do you calculate total cost?
Total Fixed Costs + Total Variable Costs
Businesses also have to consider the opportunity costs of being in the business
Define production, explicit and implicit costs
Production costs = all explicit and implicit costs
Explicit costs = inputs that require a money outlay
- Include fixed and variable costs
Implicit costs = costs that don’t require a money outlay
- The opportunity cost of money and time
What is the difference between economic and accounting profit?
Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs
Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs
Economic profit is smaller than accounting profit
How do you graph total cost?
The total cost curve will take into account the constant fixed cost & the increasing variable cost
The total cost will run parallel to the variable cost, with the difference between the two lines being the fixed cost
What are average costs, and how can you calculate them?
Average costs are found by dividing the firm’s costs by the quantity of output produced
Average Fixed Cost = total fixed cost divided by output
Average Variable Cost = total variable cost divided by output
Average Total Cost = total cost divided by output
- OR Fixed Cost/Output + Variable Cost/Output
What is marginal cost?
The increase in total cost caused by an extra unit of production
Marginal Cost = change in total cost divided by change in output
What is marginal cost?
The increase in total cost caused by an extra unit of production
Marginal Cost = change in total cost divided by change in output
What is the shape of an average total cost curve in a typical cost curve?
Average Total Cost Curve is U-shaped
At low levels of output, we have high average fixed costs spread over a small number of units, but average variable costs are also small
As average fixed costs decrease, average total cost also decreases
This occurs until higher levels, when the increase in average variable cost becomes greater and a larger component of ATC, bringing average costs up
The Minimum Efficient Scale is the point on the ATC curve where average costs are at their lowest possible level
What is the shape of the marginal cost curve?
The marginal cost curve is linked to the marginal productivity of the inputs
When marginal productivity is increasing, it means that a business is increasing their output at a faster rate than they are increasing their costs
Therefore the additional cost per unit must be falling
When the marginal productivity of labour is decreasing, it means that a business is increasing their output slower than they are increasing their costs
Therefore the additional cost per unit must be increasing
Where does the marginal cost curve cut ATC & AVC?
When marginal cost is less than average cost, ATC is decreasing
When marginal cost is greater than average cost, ATC is increasing
MC is equal to ATC at the minimum of the ATC cost curve
