Types Of Costs, Revenue And Profit, Short Run And Long Run Production Flashcards
Isoquant
A curve showing the possible combinations of two factors of production that can be used to produce the same level of output.
Total product
Total output of a firm.
Marginal product
The change in output arising from the use of an additional factor of production.
Marginal product
Change in total output ➗ Change in factor of production
Average product
Total output ➗ Number of labour employed
Short run production function
A graph that shows the maximum possible output from a given set of factor inputs.
Shows the relationship between quantity of factor inputs used and total product obtained.
Graph of short run production function
X-axis: Number of workers
Y-axis: Output of goods
Label ‘Total product curve’ at the end of the curve
The curve reflects diminishing returns whereby as labour increases, the amount of additional output gets smaller.
Analysis of graph:
1. Output increases.
2. After a certain point, total output starts to diminish.
3. This is due to limited resources available. The firm hires more workers, quality of workers depreciate, leads to decrease in total production.
Diminishing returns / Law of variable proportions
- Law of diminishing returns, also referred to as the law of diminishing marginal returns, states that in a production process, as one input variable is increased, there will be a point at which the marginal per unit output will start to decrease, holding all other factors constant.
> When the output from an additional unit of input leads to fall in marginal product.
> Adding more labour can increase output but these comes a point where the marginal return will fall and might even be negative. - Diminishing returns to labour occurs when the marginal product of labour starts to fall.
> meaning total output will be increasing at a decreasing rate
> as productivity falls, the marginal cost of production will increase - This law only applies in the short un as in the long run, all factors are variable.
What cause marginal products to fall?
- Beyond a certain point, new workers will not have as much capital equipment to work with so it becomes diluted among a large workforce (less capital per worker).
- Based on the table,
> Initially, marginal product is rising, example, the 4th worker adds 26 to output and the 5th worker adds 28.
> Marginal product then starts to fall. After the 6th worker, diminishing returns sets in, as the MP declines.
> The 7th worker supplies 26 units and the 8th worker just added 20 units. At this point, production demonstrates diminishing returns.
Firm
- Firm is a business that hires factors of production in order to produce goods and services.
> They organise factors of production to produce output.
Fixed costs
Factors of production that cannot be changed in the short run.
> Costs that are independent of oitput in the short run.
> Costs that do not vary with the level of output.
> Can be drawn as a horizontal straight line.
> Examples: rent, offices, computers, machinery.
Variable costs
- Costs that can vary.
> Costs that vary directly with output.
> When production increases, so do variable costs.
> All costs are variable in the long run.
> Examples: raw materials or component costs, electricity, packaging and shipping.
Short run cost function
X-axis: Output
Y-axis: Cost
TFC: horizontal straight line above 0
TVC: inverted ‘S’ curve start from 0
TC: inverted ‘S’ curve start from TFC
TC and TVC curves are parallel because the vertical distance between the two is the constant TFC.
Total cost (TC)
Total fixed cost (TFC) ➕ Total variable cost (TVC)
Average total cost (ATC)
Total cost ➗ Output
> ATC shows the cost per unit of any chosen output
Increased output will raise total costs hence ATC increases