Production Flashcards
SR vs LR vs VLR
SR - at least one FOP is fixed, but usually only labour is variable
LR - all FOP are variable
VLR - all FOP are variable including state of technology and govt legislation
production function
max possible output from a given set of factor inputs
in the SR, is upward sloping until it tapers off due to DMR
average product
total output/total workers
one measure of productivity
explain the shape of the SR ATC curve
- ATC = AFC+AVC
- AFC curve continues to be downward sloping as output increases since FC are constant
- AVC rises as output increases due to DMR
- ## eventually the increase in AVC outweighs the fall in AFC, causing the ATC curve to take a U shape
normal profit
minimum return needed by a firm to remain in business
supernormal profit
that earned above NP
subnormal profit
that earned below normal profit
explain the law of DMR
short run concept
capital is fixed in the SR so as labour is continually added to a fixed capacity, the marginal product of labour will initially rise
this is due to** productivity and efficiency** gains from specialisation and division of labour - capacity better utilised
but then MP begins to fall due to inefficiencies in the production process - over-utilisation of capacity
every worker begins adding more to costs than to output
accounting VS implicit costs
payments of money made for business expenses like raw materials VS the opportunity cost of using a factor of production like rent that could have been earned from a factory space
economic profit VS accounting profit
TR - economic costs where EC = accounting plus implicit costs
TR - accounting costs
relationship between MC and VC in the SR
MC is the change in variable costs which is the change in total costs
since fixed costs cannot change in the SR
explain the shape of the AVC curve
- initially downward sloping due to productivity gains
- then when DMR sets in, MP falls and MC rise, which means average variable costs must have risen
- remember MC = change in VC
explain the shape of the AFC
is continuously downward sloping as output increases
fixed costs are constant in the short run meaning that a constant numerator with a rising denominator leads to a smaller average figure
why do all costs become variable in the LR?
size of the production facility or other capital intensive means of production may not be easily expanded in short run due to financial or space constraints, for e.g. so a firm facing a higher demand for its good is unable to significantly expand production in the SR
However, in a long run, it is easier for the firm to purchase more capital thus making these factors variable in a long run.
increasing VS decreasing VS constant returns to scale
LR concept:
Increasing: a percentage increase in inputs leads to a greater percentage increase in outputs
Decreasing: opposite
Constant: % increase in inputs leads to same % increase in output
what causes increasing RTS?
as the firm expands its inputs and production, it is able to make efficiency gains - this is the idea of economies of scale! Give an example an EOS to support this explanation