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ECON1010 > Week 4 > Flashcards

Week 4 Flashcards

1
Q

What is technology?

A

Processes firms use to turn inputs into outputs of goods/services

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2
Q

What is technological change?

A

A change in a firm’s ability to produce output with given quantity of inputs.

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3
Q

What is the basis activity of firms?

A

Use inputs to product outputs

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4
Q

What is the result of technological change

A

Producing MORE outputs using the SAME/FEWER inputs

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5
Q

Why can technological change occur?

A
  • Rearrangement of factory floor
  • Change layout of retail store
  • Training program
  • More reliable/efficient equipment
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6
Q

What is the Marginal Product of Labour (MPL)?

A

The additional output a firm produces as a result of hiring 1 more worker

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7
Q

How is Marginal Product of Labour (MPL) calculated?

A

MPL is calculated by determining how much total output increases as each additional worker hired.

i.e. increase in quantity of units produced (outputs)

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8
Q

What is the cause of increased output from MPL?

A
  • Division of labour
  • Specialisation
  • Cos division of tasks btw workers means firms reduce time lost from workers moving btw tasks
  • Cos division of tasks allows more specialisations - as workers become more specialised and therefore more skilled, efficient and quick
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9
Q

What is the Law of Diminishing Returns?

A

At some point, adding more of a variable output to the same amount of fixed input will cause the MP of variable input to decline.

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10
Q

Why do firms experience Law of Diminishing Returns?

A

Cos firms use up all gains from division of labour and specialisation

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11
Q

Can MPL become -ve?

A

Yes - when divison of labour and specialiation becomes too much.

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12
Q

What happens (to output) when MPL is -ve?

A

Level of output declines

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13
Q

What is the Average Product of Labour (APL)/

A

The total output produced by a firm, is divided by the number of workers.

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14
Q

What is MPL?

A

How much total output changes as the number of workers change.

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15
Q

What is APL?

A

The average number of outputs workers produce.

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16
Q

What are the axis for graph showing total output?

A

Y-Axis: Output

X-Axis: Quantity of workers

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17
Q

What happens (initially) when more staff hired?

A

Output increases as more workers hire due to

  • division of labour
  • specialisation
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18
Q

Does output increase at constant rate as more staff hired?

A

No - the increase in input doesn’t occur at constant rate. It initially increases at an increasing rate.

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19
Q

Can MPL fall?

A

Yes MPL can fall, and returns diminish, at a point, when more workers hired if same equipment/machines.

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20
Q

What happens when the point of diminishing returns is reached?

A

Production increases at a decreasing rate

Cos each extra worker causes a smaller increase in production

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21
Q

Summarise MPL trend

A
  • MPL rises initially due to effects of specialisation and division of labour
  • MPL then falls due to effect of diminishing returns
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22
Q

What happens to average PL when MPL > APL?

A

Average PL must be increasing

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23
Q

What happens to average PL when MPL < APL?

A

Average PL must be decreasing

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24
Q

Where is APL when MPL = APL?

A

APL is at its maximum

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25
Q

What is Marginal Cost?

A

The additional cost to a firm of producing one or more units of a good

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26
Q

When are optimal decisions made?

A

At the margin.

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27
Q

How is Marginal Cost (MC) calculated?

A

Change in Total Cost / Change in Output

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28
Q

What is the usual shape of MC curve? Why?

A

U-shaped

MC decreases, as first,
MC then later increases

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29
Q

When MPL increases, what happens to the MC of output?

A

MC decreases

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30
Q

When MPL decreases, what happens to the MC of output?

A

MC increases

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31
Q

What happens to ATC when MC < ATC?

A

ATC is decreasing

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32
Q

What happens to ATC when MC > ATC?

A

ATC is increasing

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33
Q

Where is ATC when MC = ATC?

A

ATC is at its lowest point

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34
Q

Are all costs variable in the long run?

A

Yes, all costs are variable in the long run.

There are no fixed costs in the long run.

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35
Q

In the long run, TC = VC, True or False?

A

True

Cos all costs are variable in the long run.

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36
Q

In the long run, ATC = AVC, True or False?

A

True

Cos all costs are variable in the long run.

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37
Q

What is the long-run average cost (curve)?

A

A curve showing the LOWEST COST at which a firm can produce a given quantity of output in the long run when no inputs are fixed.

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38
Q

What do economies of scale exist?

A

When a firm’s long-run average costs fall as it increases its scale of production and the quantity of output it produces

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39
Q

What is the short-run average cost (curve)?

A

A curve that represents the cost that a firm faces when some inputs the firm uses in fixed

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40
Q

Why are long-run average cost (curve) used for planning?

A

Cos they show the effect on cost of expanding output.

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41
Q

Why do firms encounter economies of scale?

A
  • firm’s technology makes its possible to increase production with a smaller proportional increase in input
  • workers/managers become more specialised, therefore becoming more productive as output expands
  • large firms can purchase inputs at a lower cost than smaller firms… as firms expand, its bargaining power with suppliers increases and average costs reduce
  • as firms expand it can borrow money more cheaply
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42
Q

Do economies of scale continue forever?

A

No

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43
Q

What is a key feature of a long run AC curve?

A

AC curve generally has a flat segment stretching over the substantial rage of output - which represents CONSTANT RETURNS TO SCALE

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44
Q

When do constant returns to scale exist?

A

Exist when a firm’s long-run AC remain unchanged as it increases its scale of production and quantity of output it produces

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45
Q

What do firms need as the scale of production and quantity of output?

A

To increase inputs proportionally

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46
Q

What is the minimum efficient scale?

A

The level of output at which all economies of scale are exhausted.

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47
Q

When do diseconomies of scale exist?

A

Exist when a firm’s long-run AC increases as it increases the scale of production and quantity of output it produces

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48
Q

What do firms expand to over time?

A

As large as MINIMUM EFFICIENT SCALE

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49
Q

What do firms not expand to over time?

A

Diseconomies of scale

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50
Q

Why does the short-run MC curve slope upwards?

A

Cos of the law of diminishing returns

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51
Q

Why does the long-run MC curve slope upwards?

A

Cos of the diseconomies of scale

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52
Q

What is the formula for TOTAL COST?

A

Sum of all costs of inputs in the production

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53
Q

What are FIXED COSTS?

A

Costs that remain the constant (as output changes)

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54
Q

What are VARIABLE COSTS?

A

Costs that change as output changes

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55
Q

What is MARGINAL COST?

A

The additional cost of producing one more unit

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56
Q

What is the formula for AVERAGE TOTAL COST?

A

Total Cost / Output Quantity

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57
Q

What is the formula for AVERAGE FIXED COST?

A

Total Fixed Cost / Output Quantity

58
Q

What is the formula for AVERAGE VARIABLE COST?

A

Total Variable Cost / Output Quantity

59
Q

What is total productivity (in short term)?

A

Total number of units/outputs produced with number of employees

Y-Axis - Units produced
X-Axis - Staff hired

60
Q

Why does an increase in productivity not occur at a constant rate (in short term)?

A

Because of specialisation and division of labour.

  • output increases at an increasing rate because every additional labour produced more than previous worker
61
Q

What is marginal productivity (in short term)?

A

The additional output is produced by hiring an additional worker.

  • MP rises initially due to the specialisation of each new labour,
  • MP then starts to decline due to the effects of the diminishing returns
62
Q

What is average productivity (in short term)?

A

The average productivity curve is the average productivity of the marginal productivity of the labour.

63
Q

What does the slope of the AP curve depend upon (in short term)?

A

The slope of the MP curve.

64
Q

When is profit maximised?

A

When production cost is low and productivity is high

65
Q

What is SHORT RUN?

A

Period of time during which at least one input is fixed.

Up to 1 year.

66
Q

What is LONG RUN?

A

Period of time long enough to allow a firm to

  • vary all inputs
  • adopt new tech
  • change size of operation

Over one year

67
Q

What is the TOTAL COSTS?

A

The costs of all inputs a firm uses in the production

68
Q

What are VARIABLE COSTS?

A

The costs which change as the quantity of output changes

69
Q

What is FIXED COSTS?

A

The costs that remain constant as the quantity of output changes

70
Q

What is the formula for total costs?

A

TC = TFC + TVC

71
Q

What is OPPORTUNITY COST?

A

The highest valued alternative that must be given up to engage in an activity

72
Q

What is EXPLICIT COST?

A

A cost that involves spending money

73
Q

What is IMPLICIT COST?

A

A non-monetary opportunity cost

74
Q

What is SHORT RUN?

A

Period of time during which at least one input is fixed.

Up to 1 year.

75
Q

What is TOTAL COST?

A

The cost of all factors of production used

76
Q

What is MARGINAL COST?

A

The change to TC from producing one more unit/good

77
Q

What is AVERAGE TOTAL COST?

A

The total cost divided by quantity

78
Q

What is TOTAL VARIABLE COST?

A

The cost of variable factors of production used by a firm

To change its output in the SHORT RUN a firm must change the quantity of labour/variable components…

So, TVC changes as output changes

79
Q

What is the formula for marginal cost?

A

MC = change in TC / change in Q

80
Q

MPL increases, what is the impact on MC?

A

MC of production decreases

81
Q

MPL decreases, what is the impact on MC?

A

MC of production increases

82
Q

What is the shape of the MC curve? Why?

A

U-Shaped cos MC decreases then increases.

83
Q

What is the formula for Average Total Cost?

A

ATC = TC / Q

84
Q

What is impact on ATC if MC < ATC?

A

ATC will decrease

85
Q

What is impact on ATC if MC > ATC?

A

ATC will increase

86
Q

What curve is MC linked to? Why?

A

MPL curve

If MPL increases then MC decreases
If MPL is at its MAX, MC is at its MIN

87
Q

What curve is AC linked to? Why?

A

AP curve

If AP increases then AC decreases
If AP is at its MAX, then AC is at its MIN

88
Q

In the long run are the resources used by a firm fixed, variable or mixed?

A

All variable in the long run, so all costs are variable in the long run

89
Q

In the long run are the resources used by a firm fixed, variable or mixed?

A

All variable in the long run, so all costs are variable in the long run

90
Q

What is the LONG RUN AVERAGE COST CURVE?

A

A curve showing the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed

91
Q

What are ECONOMIES OF SCALE?

A

These exist when a firm’s long-run average costs fall as it increases its scale of production and the quantity of output it produces

92
Q

What is CONSTANT RETURNS TO SCALE?

A

These exist when a firm’s long run average costs remain unchanged at it increases its scale of production and the quantity of output it produces

93
Q

What is MINIMUM EFFICIENT SCALE?

A

The level of output at which all economies of scale have been exhausted - it is the minimum point on the long-run average cost curve

94
Q

What are DISECONOMIES OF SCALE?

A

These exist when a firms long run average costs rises as increases its scale of production and the quantity of output it produces

95
Q

What is SHORT RUN?

A

period of time < 1 year

in short run, fixed costs don’t change with quantity of output but variable costs changes with quantity of output

96
Q

What are fixed costs?

A

Costs that don’t change with output

97
Q

What are variable costs?

A

Costs that change with output

98
Q

What is LONG RUN?

A

period of time > 1 year

life is more flexible ‘cost start to plan

no fixed factors of production
all inputs are variable

99
Q

What is short run costs based on ?

A

Law of diminishing returns

100
Q

What is long run costs based on ?

A

Economies and diseconomies of scale

101
Q

What is Marginal Cost?

A

The extra cost of producing an extra unit

102
Q

Formula for AVC

A

TVC / Q

103
Q

Formula for AFC

A

TFC / Q

104
Q

Formula for TC

A

TFC + TVC

105
Q

Formula for ATC

A

AVC + AFC

or

(FC/Q) + (VC/Q)

106
Q

What is Marginal Product

A

MP is the extract product of employing 1 more worker

107
Q

Formula for MP

A

Change in total product / change in labour

108
Q

What is Marginal Cost?

A

Extra cost of producing 1 more unit of output

109
Q

Formular for MC

A

Change in total cost / change in output

110
Q

What happens to MP when AP declines? Why?

A

MP declines.

Cos AP follows MP

111
Q

What are (3) stages of law of diminishing returns?

A
  1. MP increases, TP increases at an increasing rate.
  2. MP decreases (but still +ve), TP increases at a slower rate
  3. MP is -ve, TP decreases
112
Q

When MP = 0, what is TP?

A

At its MAX

113
Q

What is the law of diminishing returns?

A

As more variable factors are added to a fixed factor, MP will eventually fall.

  • early stage of production, as labour is added, specialisation occurs and productivity increases.
  • eventually, as more labour is added (but same fixed inputs) then productivity falls (as same equip), so MP will fall… law of diminishing returns kicks in.
  • ultimately as more workers are added (but same fixed inputs) then MP will be -ve (due to overcrowding)
114
Q

What does the law of diminishing returns relate to?

A

Variable Inputs

MP

115
Q

Define law of diminishing returns

A

at some point adding more variable inputs to given fixed input will cause the MP to variable input to decline

116
Q

What is the relationship between cost and productivity?

A

Inverse

  • as Productivity increases, Cost decreases
    so. .. MP up, MC down and AP up, AVC down
  • as Cost increases, Productivity decreases
    so. .. MP down, MC up and AP down, AVC up
117
Q

What happens to the average when marginal > average?

A

Average is pulled up

118
Q

What happens to the average when marginal < average?

A

Average is pulled down

119
Q

Where is MC when productivity (MP) is at its MAX?

A

MIN

120
Q

Where is CC when productivity (AP) is at its MAX?

A

MIN

121
Q

What is MC curve linked to?

A

MP Curve

If MP increases, MC decreases
If MP = Max, MC = Min

122
Q

What is AC curve linked to?

A

AP Curve

If AP increases, AC decreases
If AP = Max, AC = Min

123
Q

Formula for AFC

What does this mean for AFC? Describe the curve

A

TFC / Q

So, as Q increases, AFC decreased

So, the curve is continually decreasing

124
Q

Formula for AVC

Describe curve

A

TVC / Q

U-shaped

125
Q

Formula for ATC

Describe curve

A

AFC + AVC

U-shaped

126
Q

What is the distance btw ATC and AVC?

A

AFC

127
Q

Where does MC interest ATC?

A

At ATC’s MIN

128
Q

Formula for AP

A

TP / L

129
Q

Formular for MP

A

change in TP / change in labour

130
Q

Formula for TC

A

TFC + TVC

131
Q

Formula for AVC

A

TVC / Q

132
Q

Formula for AFC

A

TFC / Q

133
Q

Formula for ATC

A

TC / Q

AFC + AVC

134
Q

Formula for MC

A

change in TC / change in Q

change in TVC / change in Q

135
Q

What are economies of scale?

A

Costs fall as output increases

i.e. increasing returns to scale

136
Q

What are constant returns to scale?

A

Cost remains same (ATC)

137
Q

What are diseconomies of scale?

A

Cost rises as output increases

138
Q

What causes economies of scale?

A
  • more specialisation
  • more efficient equip/tech meaning productivity up and lower unit cost
  • bigger companies, have more bargaining power, so can purchase inputs at lower prices
  • ability to borrow money more cheaply
139
Q

What occurs when quantity increases and AC decreases?

A

Economies of scale

140
Q

What occurs when quantity increases and AC remains constant?

A

Constant returns to scale

141
Q

What occurs when quantity increases and AC increases?

A

Diseconomies of scale

ECON1010 (5 decks)

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