Production and cost theory Flashcards
Marginal product
The addition to total output brought about by adding one more worker to the labour force.
Specialisation & Division of labour
Benefits firm by allowing more efficient organisation eg. dividing production tasks among greater number of workers.
- workers become better and more efficient by socialising in one task.
- Adam Smith’s pin theory
Law of diminishing marginal productivity/marginal returns
- short term law
- as variable FoP added to fixed factors, eventually the marginal returns will fall.
Relationship between marginal and average curves
Marginal greater than average, average rises.
Marginal less than average, average falls.
Marginal equals average, average is constant and therefore neither rising or falling.
Total cost
Total fixed cost + Total variable cost
Average cost
Average fixed cost + Average variable cost
Fixed costs
Firms must pay in short run
eg. rent on land, maintenance cost on buildings
Variable costs
Cost of employing variable factors of production in the short run.
eg. labour
Average Variable Costs
AVC fall until diminishing law of returns sets in, then it begins to rise with output.
Law of diminishing returns leads to rising marginal costs.
Returns to scale
Describes how output changes when the scale of all factors of production change in the long run.
No mention of money costs of production..
Long run production theory.
Economies of scale
Long run cost theory.
LRAC fall as output increases.
Reduce a firms LRAC.
Diseconomies of scale
LRAC rise as output increases.
Increase a firms LRAC.
Increasing returns of scale….
leads to economies of scale.
Decreasing returns of scale…
leads to diseconomies of scale.
Horizontal LRAC
Lack significant EoS or DEoS.
Size of firm is limited by market constraints rather than by the onset of DEoS.
L Shape Curve.
Horizontal after Minimum Efficient Scale.
