Production, costs and revenue Flashcards
How is short-run defined?
a period of time when at least one of the factors of production is fixed
How is long-run defined?
a period of time when all factors of production are variable
Define marginal returns of labour
the change in the quantity of total output resulting from the employment of one more worker holding all other factors of production fixed
Define law of diminishing returns
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
Define productivity and labour productivity
1.Output per unit of input
2.Output per worker
Why is the SRAC curve shaped like a dome ?
Because average costs fall due to productivity gains but they being increasing due to diminishing returns as a result of fixed factors of production
Define returns to scale
rate by which output changes if the scale of all factors of production is changed.
ONLY LONG RUN
What are the 3 possibilities with returns to scale ?
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What is the link between returns to scale and economies and diseceomies of scale ?
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.
Define economies and diseconomies of scale
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what is the minimum efficient scale concept ?
- as output increases long run average costs fall
- 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
Why is the LRAC shaped like U ?
Because LRAC fall due to economies of scale and rise due to diseconomies of scale
How do you find the optimum firm size ?
It is the size of firm at the lowest point on the firms LRAC
What are 6 reasons of economies of scale ?
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
What are 3 reasons for diseconomies of scale ?
- managerial problems
2.communication failure
3.Motivation loss as firms grow - over specialisation
What is the difference between internal and external economies of scale ?
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
Define variable and fixed costs
- 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