Production Flashcards
production function
maximum possible output from a given set of factor inputs (the relationship between quantity of inputs and the total product)
see mankiw
marginal product
change in output resulting from the use of one more unit of a factor input
law of DMR
law stating
that if a firm increases
its inputs of one factor
of production while
holding inputs of other
factors fixed, eventually
the firm will get
diminishing marginal
returns from the
variable factor
when explaining, make sure to explain why, i.e. initial productivity improvement from better utilisation and DOL/specialisation but then marginal productivity declines, extra workers contribute more to MC than MP
average product
TP divided by number of workers employed - measure of productivity
ATC
average total cost:
total cost divided by
the quantity produced;
sometimes known as
unit cost
total cost
sum of all
costs that are incurred
in producing a given
level of output (including
opportunity cost)
sunk costs
costs
incurred by a firm that
cannot be recovered if
the firm ceases trading
short run
period during which at least one FOP is fixed and usually only labour is variable
long run
period over
which the firm is able to
vary the inputs of all its
factors of production
very long run
time period when all key FOPs are variable, and additional factors outside the control of the firm can change like the state of technology and government policy
returns to scale
increasing - when a
percentage increase
in inputs results in
a larger percentage
increase in output
constant -
decreasing -
economies of scale
occur for a firm when
an increase in the scale
of production leads to
production at lower
long-run average cost
internal - occur as a single firm expands
external - occur due to the expansion of the industry in which the firm operates
diseconomies of scale
occur for a firm when
an increase in the scale
of production leads
to higher long-run
average costs
minimum efficient scale
the level of
output at which longrun average cost
stops falling as output
increases
X-inefficiency
situation arising when
a firm is not operating
at minimum cost due to lack of competition leading to complacency, i.e.
organisational slack
TR
revenue received by a
firm from its sales of a
good or service; it is the
quantity sold, multiplied
by the price
AR
the average revenue
received by the firm per
unit of output; it is total
revenue divided by the
quantity sold
MR
the additional revenue
received by the firm if it
sells an additional unit
of output
normal profits
the return needed for a firm
to stay in a market in
the long run
SNP
profits earned above normal profit
subnormal profit
that which is earned below normal profits
accounting profits
the profits made by
a business based
on explicit costs
incurred but excluding
opportunity cost
SR shutdown price
the price below
which a firm will choose
to exit the market in the
short run because it
is not able to cover its
fixed costs
LR shutdown price
the price
below which a firm
will choose to exit the
market in the long run
because it is not able
to cover its long-run
average total costs
