Productions, costs and revenue Flashcards
What is assumed in the short run about production?
In the short run at least one factor is fixed, usually the amount of space, land and machinery they have.
Define Total Product
Total Return/Product - This is the total amount of outputs a firm produces from all its inputs
Define Average Product
Average Return/Product - This is the average return of 1 input, or the amount of output created from one input. Is calculated as total outputs / total inputs
Define Marginal Product
Marginal Return/Product - This is the additional output created by adding one extra input
Explain the shape of this graph. Label the important points
Initially as we add more inputs of labour we get increasing marginal returns due to specialisation of labour.
However, given in the short run factors of production such as capital are fixed, past a certain point, adding more labour leads to overcrowding ext, and therefore we get diminishing marginal returns
Once marginal product in negative, adding a additional unit of labour actually decreases total output due to too much overcrowding, so we get diminishing total returns
Draw a graph with the axis of Total Output vs Quantity of Inputs
Explain why marginal product cuts through average product at its top point
When the marginal product (the additional outputs from one additional input) is still greater than average product, the average product will still therefore be rising. Once this is below average product, average product must therefore fall
Explain the concepts of increasing marginal returns and diminishing marginal returns
Increasing marginal returns occurs because of specialisation
What is the process of production
Production converts inputs, such as the services of factors of production from capital
and labour, into a final output. This will satisfy consumer needs and wants.
What is productivity?
This the output produced per input into production
How can productivity be increases, and what impact will this have on production?
Productivity can be increased by training workers or using more advanced capital machinery.
Being more productive means the same input, such as the number of workers, produces more output, over the same period of time.
This also decreases the average costs per unit of output, as fewer inputs are required to produce a unit of output
What is meant by specialisation and the division of labour?
Specialisation occurs when each worker is completes a specific task or produces a specific good in a production process over and over again and then moves the production line to another worker, rather than completing all the tasks in the production process individually
This involves the division of labour, in which each workers only completes their individual task, so workers must be divided and assigned to each of the required roles within the production process.
How does specialisation benefit production?
- It allows workers to gain skills in a narrow range of tasks, meaning they are all very good at their individual tasks, and therefore are a more competent workforce
- It makes it cost effective to provide workers with specialist tools. It would not be efficient to give every woodworker a laser cutter. However, as there are a small number of people who specialise in it, they can be given this specialist tool and it is cost efficient.
- Time is saved because a worker is not constantly changing tasks and moving from place to place.
Workers can specialise in tasks they are most suited too.
How is the specialisation of labour beneficial for consumers?
Output increases, costs per unit decreases and quality of products increase.
This benefits consumers.
What can the drawbacks of specialisation be?
o Work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become
dissatisfied.
o There could be more structural unemployment, since skills might not be transferable, especially because workers have focussed on one task for so
long.
o There could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly.
Why does the specialisation of labour rely on a means of exchange?
Specialisation has allowed society to achieve a standard of living much greater than possible through self sufficiency. However, specialisation can only work, if those completing specialised tasks, know there is a means of exchange, so that they can exchange their goods or services for other goods or services, such as food or a house.
This means of exchange in money/currency.
What is the difference between short run and long run average costs
In the short run at least one factor of production cannot change - this is usually the quantity of capital and size of factory.
- This means there are some fixed costs which do not change
In the long run all factor inputs can change.
- This means all costs of variable in the long run - there are no fixed costs.
What is the difference between fixed and variable costs?
Variable Costs - These are costs which vary with output. Eg, Food costs in a restaurant depends on how many meals are made, Ink costs in a newspaper company
Fixed Costs - These are costs that don’t vary with Q. eg: he cost of capital such as machinery, the rent cost on a building. We can think of fixed costs as the total costs when output = 0.
Wages are _________ costs, however _______ are fixed costs. This is because:
Wages are variable costs, however salaries are fixed costs. This is because
Draw a graph showing how Total, Fixed and Variable costs vary with output for a firm producing goods in the short run.
Total Cost - The cost of producing a given level of output. This therefore varies with level of output/production. TC = FC + VC
Total Fixed Cost - The value of costs which are fixed. We can also think of this as the total costs when output is 0. TFC does not vary with output.
Total Variable Cost - The overall cost of those factors of production that vary directly with the amount produced.
Draw a graph showing how AVERAGE total, variable and fixed costs vary with output of a firm in the short run
Average Total Cost (ATC) = total cost divided by the amount of units produced.
This initially decreases with increasing marginal returns, but then increases with diminishing marginal returns
Average Variable Cost (AVC) = total variable cost / units produced
For the same reasons as ATC, this varys with productivity
Average Fixed Cost (AFC) = Total Fixed Cost / Units Produced
Fixed cost does not change with Q, so AVC can only go down as Q increases
Marginal Cost - This is the cost of producing an extra unit of output.
It is calculated as: (change in total cost) / (change in quantity)
This initially decreases as productivity increases and we have increasing marginal returns. Once diminishing marginal returns and productivity kicks in it increases sharply
Explain this graph.
AFC = Average Fixed Costs. (TFC / Q). This therefore decreases as Q increases, and so the slope curves downwards and is always decreasing with Q
Explain the shape of the marginal cost curve
MC DEPENDS ON PRODUCTIVITY:
- If productivity increases, marginal cost decreases, as more Quantity is Produced from a smaller amount of input, or for a Smaller Cost
- Likewise, a decrease in productivity will lead to an increase in marginal costs.
- Therefore, productivity and marginal cost and inversely related
- So by finding how productivity changes with output, we can derive the marginal output curve
Explaining the shape - Diminishing and Increasing Marginal Costs
- Initially, adding more factors of production, such as workers will increase productivity. This is because workers can specialise, and so increase their productivity. This means marginal costs initially decrease
- However, after a certain point, adding more factors of production will lead to a decrease in productivity. This is because there is only a fixed amount of space in the short run, and so eventually diminishing marginal returns kicks in, causing this decrease in productivity. This causes the upwards slope in the second part of the marginal cost curve
Explain the shape of the short run average (total) cost curve
Initially costs decrease due to increasing marginal returns from the specialisation of labour
They then increase due to diminishing marginal returns
The AFC just tends to zero so has little impact on the curve
What is the difference between diminishing marginal returns and diseconomies of scale?
Diminishing returns relate to the short run – higher SRAC. Diseconomies of scale is concerned with the long run. Diseconomies of scale occur when increased output leads to a rise in LRAC – e.g. after Q4, we get a rise in LRAC.
At output Q1, we get diminishing returns, shown by SRAC1.
If the factory, increases capital, we can get a different outcome, shown by SRAC2. But, we still get diminishing returns in the short run.
Explain how
Explain the following diagram.
When would this be a good diagram to use in an essay?
This diagram shows how SRAS (when atleast on factor of production is fixed) varies with LRAC.
Best used as an evaluation point to suggest that the impact on a consumers of a given change in the LRA or SRAS curve also is dependant on the SRAS/LRAS
Explain how returns to scale relates to economies of scale
When there are increasing returns to scale (long run ave costs falling with increased output), a firm is experiencing economies of scale
When the opposite is happening, as the additional cost of increasing output is greater than the average cost (due to alienisation, dismotivation, slower communication, bureacracy), there are dieconomies of scale
Explaination: Returns to scale in the the amount of output a given firms creates per unit of imput. When there are economies of scale, LRAC are decreasing suggesting that the cost of production of a unit of output is falling. This is due to increasing returns to scale because at this point the amount of inputs to produce output is falling
As such, the cost of producing a unit of output falls as less inputs are used and purchased per unit of output, and production is more productive
What is the MES (minimum efficiency scale)?
The lowest quantity of output along the LRAC curve at which Long Run Ave Costs are at their lowest
Draw the Average Revenue curve for both a monopoly and perfect competition
Firms in perfect competition are price takers and make up such a small proportion of the total market that they can increase supply without changing price
Monpolistic firms supply a significant proportion of the market, so price must fall as output increases, so AR is downwards sloping
Explain what is meant by the L Shaped LRAS Curve.
Why does this occur.
When can this be brought into essays?
Initially there are economies of scale, which mean a firm has increasing returns to scale and therefore the downwards sloping LRAC Curve
However, past this point, the firms does not experience diseconomies of scale, and as output increases the firms has constant returns to scale
This is due to very good management
Draw a graph showing how total, average and marginal product vary as the quantity of labour in the short run is increased
Draw and explain how total output varies with quantity of imputs in the short run
Initially increasing marginal product due to increasing marginal returns from the division and specialisation of labour
Past a certain point overcrowing occurs and diminishing marginal returns occurs
