The theory of production Flashcards
What are total costs?
Fixed costs + variable costs
What are fixed costs?
Costs of production that do not vary as output changes
What are variable costs?
Costs of production that vary with output
What is short run?
A period during of time during fixed costs and the scale of production remain fixed
What is long run?
A period of time during which all factors become variable and the scale of output can change
What is marginal product?
The output added by the extra worker or unit of a factor
What production theory is associated with the short run?
Law of diminishing marginal returns
What is increasing marginal returns?
Where the addition of an extra variable factor adds more output than the previous factor
What is diminishing marginal returns?
Where the addition of an extra variable factor adds less output than the previous factor
What is average product?
The total product divided by the number of workers
What is productive efficiency?
When a firm operates at minimum average total cost
What does variable cost vary directly with?
Output
If output rises, what happens to variable costs?
Rise
What is average fixed cost?
Total fixed costs/ Quantity
What is average variable cost?
Total variable costs/ Quantity
What is average total cost?
Total costs/ Quantity
What is marginal cost?
The cost of one extra unit of output
When output increases, what happens to average variable costs?
Increase
When output increases what happens to average fixed costs?
Decreases
What is the relationship between average and marginal costs?
The marginal cost will cut the average cost at its lowest point
What production theory is associated with long run?
Returns to scale
What is increasing returns to scale?
Where an increase in factor inputs leads to a more than proportionate increase in output
What is decreasing returns to scale?
Where an increase in factor inputs leads to a less than proportionate increase in output
What is constant return to scale?
Where an increase in factor inputs leads to a proportional increase in factor outputs
What is minimum efficient scale?
Corresponds to the lowest point on the LRATC curve
If a firm cannot reach the MES, how will this effect their competitiveness?
The are unlikely to be competetive with other firms
If the MES is low, is there a small or large number of firms in that industry?
Large
What is optimal output?
The ideal combination of fixed and variable factors to produce at the lowest average cost
