Theory of production Flashcards
short run d
period during which fixed costs and the scale of production stay fixed
short run other d
where at least one factor of production remains fixed
increasing marginal returns d
where the addition of an extra variable factor adds more output than the previous variable factor
average product d
total product divided by the number of workers
law of diminishing returns d
increasing amounts of a variable factor added to a fixed factor and the amount added to the total product by each additional unit of the variable factor eventually decreases
why does law of diminishing returns happen
because one factor of production is fixed so eventually becomes overloaded
optimal output d
ideal combination of fixed and variable factors to produce the lowest average cost
productive efficiency d
minimum ATC, producing the max possible output from inputs into the production process
fixed costs d
costs that do not vary with output
marginal product d
output added by the extra worker or unit of a factor
variable costs d
costs of production that vary with output
semi-variable costs d
costs which have both a fixed and variable cost element
average total cost
total cost divided by the number produced
marginal cost d
cost of the extra unit of output
why does the MC cut ATC at lowest point
because if the MC is above the average then it will pull the average up
why is there less diminishing returns in the long run
because there are no fixed factors of production
increasing returns to scale d
where an increase in factor inputs leads to a more than proportionate increase in outputs
what does the flat part on LRATC mean
constant returns to scale
decreasing returns to scale d
where an increase in factor inputs leads to a less than proportionate increase in factor outputs
constant returns to scale d
increase in factor inputs leads to a proportionate increase in factor output
minimum efficient scale
the lowest point on the long-run average total cost curve and is also known as the output of long-run productive efficiency
is the MES a single value
no it will most likely be a range of outputs
what does it mean for firms that can’t reach the MES
they are unlikely to be competitive with other firms
what does the MES depend on
nature of the industry and its costs structure (fixed and variable)
what can the MES mean for the size of the market
a large MES could mean there is only a few firms in the industry
what do many SRATCs make up
LRATC
what can a firm do when its at the lowest point on its SRATC
increase the scale of production
why may some firms not expand
lack of available finance, little likelihood of planning application granted, fears market growth temporary
what happens if a firm doesn’t expand
not reducing costs to the lowest level
why may it not matter if not at lowest point on ATC
if profits are adequate
