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
explain the shape of the LRAC curve
the LRAC curve is made of the lowest possible AC for each level of fixed factor capacity
it is a flatter u shape due to falling costs over time
each SRAC curve corresponds to a different fixed level of capital - in the SR, if it wanted to increase output due to higher demand, firm would have to move along the current SRAC curve to produce the output at a higher cost
however in the LR as FOP are variable and firm increases level of capital, moving to a new, lower SRAC curve, can produce that same higher level of output at a lower cost
in the LR, the rational firm chooses to produce a given level of output at the level of capital that results in the lowest average cost
shape of the curve is explained by RTS and EOS - increasing your level of capital will result in efficiency gains and a lower SATC until you reach the MES, and past this, increasing the level of capital you have will result in DEOS
MES
lowest level of output for which LRAC are minimised
EOS and DEOS
LRAC fall/rises as the scale of production increases due to increasing/decreasing RTS
examples of EOS
Really Fun Mums Try Making Pies
Risk bearing
Financial
Managerial
Technical
Marketing
Purchasing
risk bearing EOS
spreads business risk over larger range of output
if demand for one product range falls, has the other one to rely on for sales and revenues
managerial EOS
large firm employ specialist managers instead of generalists, which can contribute their expertise to boost workforce productivity
technical EOS
- afford to employ specialist machinery that boosts productivity
- firm utilitises their factory capacity more effectively as they produce more
- employ more workers then use division of labour and specialisation that increases productivity
purchasing EOS
purchasing in bulk allows for negotiating discounts
marketing EOS
company can bulk buying advertising resources - e.g. billboards, TV air time - which lets them negotiate lower unit costs
financial EOS
larger firms are more reputable and successful so banks perceive them as being less risky and so are willing to lend at lower IR
the KEY way to analyse the impact of EOS
as a firm grows larger and carries out the specific activity that leads to the EOS, for e.g. buying specialist machinery, total costs WILL rise, but productivity and output rises much faster than costs and so AVERAGE costs fall
costs rise but not as fast as output
external EOS
cost savings enjoyed by all firms in an industry as that industry grows larger
examples of external EOS
- better transport links increase efficiency and lower costs of transporting inputs and finished goods
- concentration of skilled labour - specialists will boost productivity
- R&D facilities move closer to firms - better tech will increase efficiency - e.g. biotech and electronics firms and Cambridge
- suppliers move closer to firms - lower transport costs
e.g. Silicon Valley, e.g. biotech and electronics firms that have R&D links with Cambridge Uni
KEY analysis for external EOS
total costs fall regardless of the level of output you are producing - even if Q is constant, TC falls, resuling in lower LRAC
represented by downward shift of LRAC curve
internal DEOS
3 Cs and an M
Control
Coordination
Communication
Motivation
KEY analysis for internal DEOS
problems leading to DEOS will reduce productivity, and increase total costs much faster than output
control as a DEOS
more workers so harder for managers to supervise all, giving workers the incentive to ‘slack off’
communication as a DEOS
harder to pass messages through the business - either from top or bottom - or leads to miscommunication - this wastes time and effort which reduces productivity
coordination as a DEOS
harder for larger departments to work alongside each other and work towards the same goal, reducing productivity
motivation as a DEOS
more workers means that each individual workers feels more alienated and dispensable, reducing morale and productivity
examples of external DEOS
- traffic congestion increases transport time and costs
- land shortages increases fixed costs
- shortages of skilled labour increases variable costs
all INCREASE TC at every level of output, upward shift of LRAC curve
implications of the LR and productivity
because all FOP can be varied, the firm can alter its mix of FOP to ensure the most efficient production possible - for e.g. improvements in capital relative to labour could increase capital intensivity, or obtain the capital for a new production process
rule for maximising efficiency with your mix of FOP
marginal product factor A/price of factor A = MP of factor B/price of factor B and so on
how to arrive at the best combo of labour and capital using isoquants and isocosts
the point where the isocost is tangential to an isoquant
significance of making subnormal profit - firm may withdraw from market in LR
