The supply decision Flashcards
Fixed factor
An input that cannot be increased in supply within a given time period
Variable factor
An input that can be increased in supply within a given time period
short run
the period of time over which at least one factor is fixed
long run
the period of time long enough for all factors to be varied
law of diminishing (marginal) returns
when one or more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish
Opportunity cost
Cost measured in terms of the best alternative forgone
explicit costs
the payments to outside suppliers of inputs
implicit costs
costs that do not involve a direct payment of money to a third party, but which nevertheless involve a sacrifice of some alternative
Historic costs
the original amount the firm paid for factors it now owns
fixed costs
total costs that do not vary with the amount of output produced
variable costs
total costs that do vary with the amount of output produced
total cost
the sum of total fixed costs and total variable costs: TC=TFC+TVC
Average total cost
total cost (fixed plus variable) per unit of output: AC=TC/Q=AFC+AVC
average fixed cost
total fixed cost per unit of output: AFC=TFC/Q
average variable cost
total variable cost per unit of output: AVC=TVC/Q
marginal cost
the cost of producing one more unit of output: MC=TC/Q
production in the short run is…
subject to diminishing returns. As greater quantities of the variable factor(s) are used, so each additional unit of the variable factor will add less to output than previous units:i.e. output will rise less and less rapidly
When measuring cost of production…
we should be careful to use the concept of opportunity cost. In the case of inputs not owned by the firm, the opportunity cost is simply the explicit cost of purchasing or hiring them. It is the price paid for them. In the case of inputs already owned by the firm, it is the implicit cost of what the factor could have earned for the firm in its best alternative use.
As some factors are fixed in supply in the short run…
their total costs are fixed with respect and output. In the case of variable factors, their total cost increases as more output is produced and hence as more of them are used. Total cost can be divided into total fixed and total variable cost.
Marginal cost is…
the cost of producing one more unit of output. It will probably fall at first but will start to rise as soon as diminishing returns set in
Average cost, like total cost, can be divided into…
fixed and variable costs. Average fixed cost will decline as more output is produced. the reason is that the total fixed cost is being spread over. greater number of units of output. average variable cost will tend to decline ate first, but once the marginal cost has risen above it, it must then rise. the same applies to average cost.
economies of scale
where increasing the scale of production leaves to lower cost per unit of output.
specialisation and division of labour
where production is broken down into a number of simpler, more specialised tasks, thus allowing workers to acquire a high degree of efficiency
indivisibilities
the impossibility of diving a factor into smaller units
plant economies of scale
economies of scale that arise because of the large size of the factory
rationalisation
the reorganisation of production(often a merger) sea s to cut out waste and duplication and generally to reduce costs
overheads
costs arising from the general running of an organisation, and only indirectly related to the level of output
economies of scope
where increasing the range of products produced by a firm reduces the cost of producing each one
diseconomies of scale
Where cost per unit of output increase as the scale of production increases
external economies of scale
where a firms costs per unit of output decrease as the size of the whole industry grows
Industry’s infrastructure
the network of supply agents, communications, skills, training facilities, distribution channels, specialized financial services, that support a particular industry
Long-run average cost curve
A curve that shows how the average cost varies with I output on the assumption that all the factors of variable. (it is assumed that the least cost method of production will be chosen for each output)
Envelope curve
A long-run average cost curve drawn as the tangency points of a series of short-run average cost curves
Average revenue
Total Revenue per unit of output. When all output is solid at the same price, average revenue will be the same as price: AR=TR/Q=P
price taker
a firm that is too small to be able to influence the market price
price maker
Firms that can choose the price it’s chargers; it face is a downward-sloping demand curve. if however it alters it’s price this will affect the quantity sold: a full in price will lead to more being sold; at a higher price will lead to less
Profit-maximising rule
Profit is maximized were marginal revenue equals marginal cost
normal profit
the opportunity cost cost of being in business.it consist of the interest that could be earned honors class asset, plus a return for risk taken.it is counted as a cost of production
Super normal profit (also known as pure profit, economic profit, abnormal profit common producer surplus or simplify profit)
the exes of total profit a bowl normal profit
short-run shut-down point
where the AR curve is tangential to the AVC curve.the firm can only just cover its variable costs.any fall in revenue below this level will cause a profit maximizing firm to shut down immediately
long-run shut-down point
Where the AR curve is tangential to the LRAC curve.the firm can just make a normal profits. any fall in revenue below this level will cause a profit maximizing firm to shut down once all costs have become variable
Total profit equals
total revenue minus total cost
Graphically, profits are
maximised at the output where marginal revenue equals marginal cost. How many phones is old, but, the level of maximum profit can be found by finding the average profit, and then multiplying it by the level of output.
Normal profit is
The minimum profit that must be made to persuade a firm to stay in business in the long run. It is counted as part of the firms cost. Supernormal profit is any profit over and above normal profit.
For the firm is that cannot make a profit at any level of output
The point where MR=MC represent the loss-minimising output
In the short run, a firm will close down if it
Cannot cover its variable costs. In the long run, it will close down if it cannot make normal profit.
Average cost or mark-up pricing
Where firms said the price by adding a profit mark-up to average cost
Public limited company
A company owned by its shareholders. Shareholders liability is limited to the value of the shares. Cheers may be bought and sold publicly- on the stock market.
Profits satisficing
Where decision-makers in a firm aim for a target level of profit rises in the absolute maximum level
Sales revenue maximisation
An alternative theory, which assumes that managers aim to maximise the firms short-run in total revenue
Principal-agent problem
Where are people (principles), as a result of lack of knowledge, cannot ensure that their best interests are served by agents
asymmetric information
Where I wanna party in an economic relationship(An agent) has more information than another(the principal).
Traditional theory assumes
Profit maximising behaviour by firms. Two major criticism of these are: firms may not have the information to maximise profits; they may not even want to maximise profits
the complexity of the environment in which from operate may mean
that firms adopt simple “rules of thumb” such as applying a mark-up, over costs when determining prices
In many companies, there is likely to be
Separation between ownership and control. It is the managers who make the decisions, and managers may look to maximise their own utility rather than that of the owners (shareholders). The problem of managers not pursuing the same goals as the owners is an example of the principal-agent problem.
External diseconomies of scale
where a firm’s costs per unit of output increase as the size of the whole industry increases
in the long-run the firm is able to
vary the quantity it uses of all factors of production, There are no fixed factors and hence no long-run fixed costs
if it increases all factors by the same point, it may experience constant,
increasing or decreasing returns to scale
Economies of scale occur when
costs per unit of output fall as the scale of production increases. This can be the result of a number of factors, some of which are directly due to increasing (physical) returns to scale. These include the benefits of special-isation and division of labour, the use of larger and more efficient machines, and the ability to have a more integrated system of production. Other economies of scale arise from the financial and administrative benefits of large-scale organisations.
When constructing long-run cost curves it is assumed that
factor prices are given, that the state of technology is given and that firms will choose the least-cost method of production for each given output.
The LRAC curve can be downward sloping, upward sloping or horizontal, depending in turn on whether
there are economies of scale, diseconomies of scale or neither. Typically LRAC curves are drawn as saucer-shaped (or as I-shaped). As output expands, initially there are economies of scale. When these are exhausted the curve will become flat. When the firm becomes very large it may begin to experience diseconomies of scale. If this happens, the LRA curve will begin to slope upwards again.
An envelope curve can be drawn which shows
the relationship between short-run and long-run average cost curves. The LRAC curve envelops the short-run AC curves: it is ‘tangential’ to them (i.e. just touches them).
Four distinct time periods can be
distinguished. In addition to the short- and long-run periods, we can also distinguish the very short- and very long-run periods. The very short run is when all factors are fixed. The very long run is where not only the quantity of factors but also their quality is variable (as a result of changing technology etc.).
total revenue
a firm’s total earnings from a specified level of sales within a specified period:TR=P*Q
total revenue(TR) is
is the total amount a firm earns from its sales in a given time period. It is simply price times quantity:
TR=P*Q.
Average revenue (AR) is
is total revenue per unit: AR = TR/Q. In other words, AR =P.
Marginal revenue is
is the extra revenue earned from the sale of one more unit per time period: MR = ATR/AQ.
The AR curve will be the same as
the demand curve for the firm’s product. In the case of a price taker, the demand curve and hence the AR curve will be a horizontal straight line and will also be the same as the MR curve.
A firm that faces a downward-sloping demand curve must obviously also face
the same downward-sloping AR curve. The MR curve will also slope downwards, but will be below the AR curve and steeper than it.
When demand is price elastic, marginal revenue will be
positive. When demand is price inelastic, marginal revenue will be negative.
A change in output is represented by
by a movement along the revenue curves. A change in any other determinant of revenue will shift the curves up or down.
