Short-run and Long-run Flashcards
What is the short-run?
The period in which at least one input is fixed
What is the long-run?
The period in which all inputs are variable
What is a fixed input?
An input that cannot be changed in the short-run
What is a variable input?
An input that can be varied within the specific period - output increases as more people are added
What is the law of diminishing returns?
The extra output produced as more units of the variable factors that are added to fixed factors will eventually decrease
What is total product?
The total output
How do we calculate the average product?
Total product / No. of variable factors
How do we calculate the marginal product?
Change in total product / change in variable factors (will eventually diminish)
What does the short-run depend on?
The amount of inputs that are used and the prices that the firm must pay for them
What are short-run total costs?
Made up of fixed costs and variable costs
What are fixed costs?
Bit dependent on the level of output
What are average costs?
Total cost / quantity produced
What are marginal costs?
The extra cost of producing one more unit
What are average fixed costs?
Fixed cost / quantity (always downward sloping)
What are marginal fixed costs?
- There are not extra fixed cost if one more unit is produced
What are variable costs?
The cost of the variable inputs (usually labor)
What are average variable costs?
Variable cost / quantity
What are marginal variable costs?
Extra variable costs if one more unit is produced
What are total costs?
Fixed cost + variable cost
What are average total costs?
Total cost / quantity OR AC = AVC + AFC
What are marginal total costs?
The extra total cost if one more unit is produced = MVC (as MFC = 0)
How do we label our average and marginal cost graphs?
MC crosses AC and AVC at its minimum, and the vertical distance between AC and AVC is equal to AFC
What are the effects of changing the scale of production?
Constant returns to scale, increasing returns to scale and decreasing returns to scale
What happens when there are increasing returns to scale?
Average costs are falling (if we increase capital by 10% and production increases by more than 10%, this is falling AC)
What happens when there are decreasing returns to scale?
Average costs are increasing
What does internal mean?
Through changes inside the firm
What does external mean?
Through changes outside the firm
What different types of economies are there?
Technical, purchasing, managerial and financial
What are the reasons for diseconomies of scale?
Motivation, communication and coordination and control
What is the minimum efficient scale?
Lowest level of output at which the LRAC are minimised
The shape of LRAC helps us to explain why there is what in some industries?
There are so many firms, there are large and small firms and there are very few firms
Where does SRAC go on a graph?
SRAC is everywhere else above LRAC as the fixed input causes the firm not produce at the cheapest level
