Production, costs and revenue Flashcards

1
Q

How is short-run defined?

A

a period of time when at least one of the factors of production is fixed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How is long-run defined?

A

a period of time when all factors of production are variable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define marginal returns of labour

A

the change in the quantity of total output resulting from the employment of one more worker holding all other factors of production fixed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Define law of diminishing returns

A

a short term law which states that as a variable factor is added to fixed factors of production, marginal and average returns begin to fall

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define productivity and labour productivity

A

1.Output per unit of input
2.Output per worker

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why is the SRAC curve shaped like a dome ?

A

Because average costs fall due to productivity gains but they being increasing due to diminishing returns as a result of fixed factors of production

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define returns to scale

A

rate by which output changes if the scale of all factors of production is changed.

ONLY LONG RUN

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the 3 possibilities with returns to scale ?
+
What is the link between returns to scale and economies and diseceomies of scale ?

A

1.Increasing returns to scale - increase in scale of all factors of production increase output more than proportionate
2.Constant returns to scale
3.Decreasing returns to scale

(Returns to scale is the long run theory of production where as economies and iseconoies are long run theories for cost)

Increasing returns to scale lead to economies of scale where as dicreasing returns to scale result in diseconomies of scale.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define economies and diseconomies of scale
+
what is the minimum efficient scale concept ?

A
  1. as output increases long run average costs fall
  2. as output increase long run average costs rise

It is the lowest output at which the firm is able to produce at the lowest LRAC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Why is the LRAC shaped like U ?

A

Because LRAC fall due to economies of scale and rise due to diseconomies of scale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How do you find the optimum firm size ?

A

It is the size of firm at the lowest point on the firms LRAC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are 6 reasons of economies of scale ?

A

1.technical economies: invest in specialist technology
2.Managerial -specialisation of workforce: increased productivity
3.marketing economies - bulk buyingand bulk marketing
5.financial economies - lower interest rates
6.risk-bearing economies - big firms are considered less risky

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are 3 reasons for diseconomies of scale ?

A
  1. managerial problems
    2.communication failure
    3.Motivation loss as firms grow - over specialisation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the difference between internal and external economies of scale ?

A

Internal: cost saving resulting from the growth of the firm itself

External: cost saving resulting from the growth of the market e.g free training

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Define variable and fixed costs

A
  1. Costs that change with output e.g wage
    2.Costs that do not change with output e.g salary and in LR they all become variable
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How do you calculate ATC ?

A

AVC+AFC

13
Q

What is the relationship between the MC and the marginal returns ?

A

They are a reflection of each other. Where the lowest costs occur when MC = AC and when they decline costs rise. LOOK AT CURVES PG 35

14
Q

What is the average revenue curve ?

A

It is the same as the demand curve

15
Q

When does maximum revenue occur ?

A

When marginal revenue is zero but then go up to the average revenue to see the actual value of revenue

16
Q

Where is the demand curve elastic, unitary and inelastic ?

A

At the top its elastic, middle unitary and bottom inelastic.
unitary when MR=0

17
Q

Define normal and abnormal profits ?

A

normal profit is essentially break even which allows firm to stay in business

abnormal profit is when both accounting and economic profit (opportunity costs - implicit costs) is positive

18
Q

Define specialisation

A

when an individual, firm or country produces a narrow range of goods and services and over time produces a comparative advantage in production.

19
Q

What are the benefits of specialisation ?

A

1.higher output: total production of goods and services is raised and quality can be improved

2.variety: consumers have access to greater variety of higher quality products

3.a bigger market: specialisation and global trade increase the size of the market offering opportunities for economies of scale

4.competition and lower prices: increased competition acts as an incentive to minimise costs, keep prices down and therefore maintains low inflation

20
Q

Define division of labour

A

where production is broken down into many separate tasks

21
Q

What are the drawbacks of division of labour ?

A

1.unrewarding: repetitive work that requires little skill lowers motivation and hits productivity

2.mass produced standardised goods lack variety for consumers

3.many people may choose to move to less boring creating a problem of high worker turnover

4.some workers may receive little training and may not be able to find alternative jobs if they find themselves out of work - they may then suffer from structural unemployment

22
Q

What curves are involved in displaying, normal, supernormal profit and economic loss ?

A

the AR and AC curves, in context of all the other curves

23
Q

When does normal and supernormal profits occur and economic loss ?

A

Normal: AC = AR
Super: AC < AR
Economic loss: AC > AR

24
Q

When does profit maximisation occur ?

A

when MC = MR but you have to move up to the AR curve to get the price level

25
Q

Define shut down price

A

it is the minimum price a firm can sell with to stay in business. As long as the price is = or > AVC.

26
Q

What is the mathematical relationship between MR and AR ?

A

The MR is twice the AR and the demand curve is unitary when MR=0

The AR is the demand curve because it is the price of a good and the demand curve shows the relationship between price and output.

27
Q

What are the roles of profit in market economy ?

A
  1. The creation of enterprise incentive
  2. The creation of worker incentives - pay related and bonuses
    3.Creation of shareholder incentives - more people buy shares can raise finance better
  3. Better resource allocation - firms allocative resources to where there is profit
    5.Econmic efficiency - dynamic
  4. Reward for innovation
28
Q

What is the difference between invention and innovation ?

A

Invention: creating something new

Innovation: develops an existing product

29
Q

How does technological change affects methods of production, productivity, efficiency and firms costs of production ?

A
  1. Methods of production: Mechanisation ( when humans run machinery ) - Electrification - computerisation - Digitalisation and now AI

2.Productivity - generally increases e.g labour productivity

3.Efficiency - increases productive and dynamic efficiencies

4.Costs of production - reduction