section 4 Flashcards
production
the process of combining scarce recourses into a finished product
productivity
the output per input per time period
labour productivity
the output per worker per time period
impact on market when productivity (and supply curve) increases
supply curve shifts right
more products (q shifts right)
cheaper prices
lower unit costs
less wastage
increased productive efficiency
specialisation
when a country, firm or individual focus production on one or small range of products
what can specialisation lead to
repetition
experience
fewer mistakes
productivity increase
why is money necessary
to avoid the issue of ‘coincidence of wants’ present in bartering
short run
time period in which at least one of the factors of production are fixed
long run
time period in which all factors of production are variable
total returns
the whole output produced by all the factors of production, including labour, employed by a firm
marginal returns
the change in the quantity of total output resulting from the employment of one more unit of the variable factor, holding all the other factors of production fixed
average returns of labour
total output divided by the total number of workers employed
law of diminishing returns
as a variable factor is added to a fixed factor of production both the marginal and eventually the average returns to the variable factor will begin to fall
only applies to the short run
returns to scale
the rate at which output changes if the scale of all the factors of production are changed
only applies in the long run
increasing returns to scale
when the scale of all the factors of production employed increases, output increases at a more than proportionate rate
constant returns to scale
when the scale of all the factors of production employed increases, output increases at a proportionate rate
decreasing returns to scale
when the scale of all the factors of production employed increases, output increases at a less than proportionate rate
fixed costs
costs that do not change with output (rents, salaries)
variable costs
costs that change with output (raw materials, wages)
total costs
total fixed costs + total variable costs
average costs
ac = total cost / output
the cost of producing one unit
marginal costs
the additional cost of producing the next unit
mc = total costs (2) - total costs (1)
economies of scale
as output increases, long run average cost decreases
diseconomies of scale
as output increases, long run average cost increases
minimum efficient scale
the lowest output at which the firm is able to produce the minimum achievable lrac
total revenue
total income received by the firm from the sales of its products
total revenue = price x quantity
average revenue
income received from the sale of one unit of product
ar = total revenue / quantity
marginal revenue
the additional revenue gained from selling one more unit
mr = total revenue (2) - total revenue (1)
normal profit
a firm makes normal profit once tr = tc
normal profit is the minimum profit required for the firm to remain in the market
normal profit is equal to the opportunity cost of the factors of production invested
supernormal/abnormal profit
when total revenue is greater than total cost
loss/ subnormal profit
total revenue is less than total cost
