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MICROECONOMICS REVISION > Production, Costs and Revenue > Flashcards

Production, Costs and Revenue Flashcards

1
Q

production?

A
  • the total output of goods and services produced by firms

- process of converting inputs into output

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2
Q

productivity?

A
  • measurement of the rate of production by various FoP

- measure of how efficiently you are generating output

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3
Q

productivity equation:

A

total output per period of time / number of units of FoP

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4
Q

labour productivity?

A

output per worker per unit of time

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5
Q

labour productivity equation?

A

total output per period of time / number of units of labour

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6
Q

specialisation?

A

individual produces a limited range of goods and services

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7
Q

division of labour?

A

specialisation at the level of an individual worker

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8
Q

exchange?

A

when one thing is traded for another

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9
Q

Benefits of specialisation and division of labour?

A

1) repetition = skills and aptitude rise
2) reduced time spent moving between different tasks = increase productivity
3) division of labour = allows people to work to their strengths

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10
Q

SHORT RUN:

A
  • period of time in which the availability of at least one FoP is fixed
  • most likely land or capital
  • in SR, firms have some fixed CoP even if they dont produce any outpu
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11
Q

LONG RUN:

A

period of time over which all FoP can be varied

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12
Q

fixed costs?

A

do not vary directly with output in the short run

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13
Q

Average fixed costs?

A
  • total fixed costs / output

- AFC FALL as output RISES because firm is able to spread fixed costs over increasing volume of output

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14
Q

variable costs?

A

vary directly with output

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15
Q

Average variable costs?

A
  • total variable costs / output

- AVC FALL in the SR but RISE at higher levels of output because more units of FoP begin to overcrowd fixed FoP

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16
Q

Total costs

A

fixed total costs + variable total costs

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17
Q

Average total costs?

A

total costs / output

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18
Q

Marginal costs?

A
  • addition to a firms total costs from making an additional unit of output
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19
Q

Economies of scale?

A
  • benefits that can arise as a firm increases its output, leading to reduced ATC
  • reflects improvement in productive efficiency
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20
Q

Internal economies of scale?

A

reductions in LR ATC arising from growth of the firm

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21
Q

Financial EoS?

A

the larger and more reputable firm = more likely banks give loans

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22
Q

Technical EoS?

A

larger businesses can afford specialist capital = increase productivity

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23
Q

Marketing EoS?

A

larger firms have huge budget for advertising

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24
Q

Managerial EoS?

A

larger firms can affor high profile CEO

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25
Q

external economies of scale

A

reduction in LR ATC arising from the growth of an industry in which a firm operates

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26
Q

Diseconomies of scale?

A

increases in ATC that firms may experience by increasing output in the LR

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27
Q

Coordination control:

A

larger firms = difficult to moniter use of all resources = increased wastage

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28
Q

communication?

A

larger firms - ineffective decision making and delays in action

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29
Q

The minimum efficient scale:

A
  • the lowest level of output at which ATC are minimised

- once achieved, barrier to entry for new firms

30
Q

Total revenue

A

price x quantity

31
Q

Average Revenue

A

total revenue / quantity (same as price(

32
Q

Marginal revenue:

A

change in tr / change in output (the addition to a firms total revenue from selling an additional unit of output)

33
Q

Perfect competition characterised by:

A

1) Large number of buyers and sellers
2) perfect knowledge of the market
3) no B2E
4) each firm sells homogenous products
- constant price, AR and MR are constant

34
Q

profit

A

total revenue - total costs

35
Q

normal profit

A

minimum level of profit required to reward entrepeneur for taking a risk

36
Q

supernormal profit

A

profit above normal profit

37
Q

how does technological change arise?

A

inventions and innovation

38
Q

invention?

A

creation of a product / process

39
Q

innovation?

A

new products and production processes that are developed into marketable goods or services

40
Q

Effects of technological change:

A

1) fall in LR ATC = dynamic efficiency

2) makes markets more competitive

41
Q

creative destruction

A
  • firms who enjoyed monopoly power see this eroded by development of ‘new’ ‘disruptive’ technologies
  • create new markets or revolutionise old ones
  • render existing products obsolete
42
Q

Law of diminishing returns

A

when additional units of variable fop are added to a fixed factor, marginal product will eventually decrease

43
Q

Why is the marginal cost curve upwards sloping?

A
  • law of diminishing returns

- as units of fop become less productive, costs begin to rise

44
Q

why does marginal cost curve always intersect average cost at lowest point?

A

marginal costs of making next unit of output will always affect average total cost

45
Q

When does average cost fall?

A

when MC < AC

46
Q

When does average cost rise?

A

when MC > AC

47
Q

when does average cost stay the same?

A

when MC = AC

48
Q

When does the law of diminishing returns set in?

A

when there is a fall in the rate of increase of marginal product

49
Q

When does average product increase?

A

MP > AP

50
Q

When does average product fall?

A

MP < AP

51
Q

What happens to average fixed costs as output increases?

A

Decreases because firms can spread fixed costs over an increasing volume of output

52
Q

What happens to AVC in the short run?

A

Initially fall but begin to rise at higher levels of output as more units of FOP overcrowd fixed FOP

53
Q

Equation for Marginal Cost

A

change in total cost / change in quantity

54
Q

When do returns to scale occur?

A

In the long run

55
Q

Increasing returns to scale?

A

When an increase in the quantity of a firm’s inputs leads to a proportionally greater change in output

56
Q

Constant returns to scale?

A

when an increase in the quantity of a firm’s inputs leads to a proportionally identical change in output

57
Q

Decreasing returns to scale?

A

when an increase in the quantity of a firm’s inputs leads to a proportionally lower change in output

58
Q

What happens when a firm achieves the MES?

A

acts as a significant barrier to entry for potential competitors in an industry

59
Q

What is the average revenue the same as?

A

price

60
Q

Equation for marginal revenue?

A

change in total revenue / change in output

61
Q

Shut down price

A

the minimum price that a firm needs to operate at in order to justify staying in the market in the short run

62
Q

When can a firm stay in the market in the short run

A
  • as long as revenues cover their variable costs (P>AVC)
  • given this, a contribution is made to cover some of the fixed costs that need to be paid regardless
  • as a result, the firm would be better off continuing production if we assume fixed costs are lost if a shut down decision is made
63
Q

When will a firm shut down in the short run?

A
  • p < AVC
  • shutdown production to minimise their losses
  • this is because not enough revenue is being generated and total losses suffered would be higher if production continued
64
Q

Shutdown point in the long run

A
  • p > or equal to LRAC, they can remain in the industry

- firms need to be making normal profit in the long run to remain in the industry

65
Q

Economies of scale AC (INTERNAL)

A
  • total costs rising

- quantity rising at a faster rate

66
Q

Economies of scale AC (EXTERNAL)

A

total costs are falling as quantity rising

67
Q

Diseconomies of scale AC

A
  • quantity rising

- total costs rising at a faster rate

68
Q

Diseconomies of scale: CONTROL

A
  • as business becomes larger, difficult for managers to control the work force
  • if employees know manager isn’t watching - slack off more
  • impacts productivity - quantity suffers
69
Q

Diseconomies of scale: COMMUNICATION

A
  • much harder to spread messages
  • delays in action
  • impact productivity
70
Q

Diseconomies of scale: MOTIVATION

A
  • as workforce gets larger, each individual worker feels less valued
  • dispensable
  • reduced motivation and reduced productivity

MICROECONOMICS REVISION (9 decks)

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