Week 4 Flashcards
What is technology?
Processes firms use to turn inputs into outputs of goods/services
What is technological change?
A change in a firm’s ability to produce output with given quantity of inputs.
What is the basis activity of firms?
Use inputs to product outputs
What is the result of technological change
Producing MORE outputs using the SAME/FEWER inputs
Why can technological change occur?
- Rearrangement of factory floor
- Change layout of retail store
- Training program
- More reliable/efficient equipment
What is the Marginal Product of Labour (MPL)?
The additional output a firm produces as a result of hiring 1 more worker
How is Marginal Product of Labour (MPL) calculated?
MPL is calculated by determining how much total output increases as each additional worker hired.
i.e. increase in quantity of units produced (outputs)
What is the cause of increased output from MPL?
- 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
What is the Law of Diminishing Returns?
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.
Why do firms experience Law of Diminishing Returns?
Cos firms use up all gains from division of labour and specialisation
Can MPL become -ve?
Yes - when divison of labour and specialiation becomes too much.
What happens (to output) when MPL is -ve?
Level of output declines
What is the Average Product of Labour (APL)/
The total output produced by a firm, is divided by the number of workers.
What is MPL?
How much total output changes as the number of workers change.
What is APL?
The average number of outputs workers produce.
What are the axis for graph showing total output?
Y-Axis: Output
X-Axis: Quantity of workers
What happens (initially) when more staff hired?
Output increases as more workers hire due to
- division of labour
- specialisation
Does output increase at constant rate as more staff hired?
No - the increase in input doesn’t occur at constant rate. It initially increases at an increasing rate.
Can MPL fall?
Yes MPL can fall, and returns diminish, at a point, when more workers hired if same equipment/machines.
What happens when the point of diminishing returns is reached?
Production increases at a decreasing rate
Cos each extra worker causes a smaller increase in production
Summarise MPL trend
- MPL rises initially due to effects of specialisation and division of labour
- MPL then falls due to effect of diminishing returns
What happens to average PL when MPL > APL?
Average PL must be increasing
What happens to average PL when MPL < APL?
Average PL must be decreasing
Where is APL when MPL = APL?
APL is at its maximum
What is Marginal Cost?
The additional cost to a firm of producing one or more units of a good
When are optimal decisions made?
At the margin.
How is Marginal Cost (MC) calculated?
Change in Total Cost / Change in Output
What is the usual shape of MC curve? Why?
U-shaped
MC decreases, as first,
MC then later increases
When MPL increases, what happens to the MC of output?
MC decreases
When MPL decreases, what happens to the MC of output?
MC increases
What happens to ATC when MC < ATC?
ATC is decreasing
What happens to ATC when MC > ATC?
ATC is increasing
Where is ATC when MC = ATC?
ATC is at its lowest point
Are all costs variable in the long run?
Yes, all costs are variable in the long run.
There are no fixed costs in the long run.
In the long run, TC = VC, True or False?
True
Cos all costs are variable in the long run.
In the long run, ATC = AVC, True or False?
True
Cos all costs are variable in the long run.
What is the long-run average cost (curve)?
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.
What do economies of scale exist?
When a firm’s long-run average costs fall as it increases its scale of production and the quantity of output it produces
What is the short-run average cost (curve)?
A curve that represents the cost that a firm faces when some inputs the firm uses in fixed
Why are long-run average cost (curve) used for planning?
Cos they show the effect on cost of expanding output.
Why do firms encounter economies of scale?
- 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
Do economies of scale continue forever?
No
What is a key feature of a long run AC curve?
AC curve generally has a flat segment stretching over the substantial rage of output - which represents CONSTANT RETURNS TO SCALE
When do constant returns to scale exist?
Exist when a firm’s long-run AC remain unchanged as it increases its scale of production and quantity of output it produces
What do firms need as the scale of production and quantity of output?
To increase inputs proportionally
What is the minimum efficient scale?
The level of output at which all economies of scale are exhausted.
When do diseconomies of scale exist?
Exist when a firm’s long-run AC increases as it increases the scale of production and quantity of output it produces
What do firms expand to over time?
As large as MINIMUM EFFICIENT SCALE
What do firms not expand to over time?
Diseconomies of scale
Why does the short-run MC curve slope upwards?
Cos of the law of diminishing returns
Why does the long-run MC curve slope upwards?
Cos of the diseconomies of scale
What is the formula for TOTAL COST?
Sum of all costs of inputs in the production
What are FIXED COSTS?
Costs that remain the constant (as output changes)
What are VARIABLE COSTS?
Costs that change as output changes
What is MARGINAL COST?
The additional cost of producing one more unit
What is the formula for AVERAGE TOTAL COST?
Total Cost / Output Quantity
What is the formula for AVERAGE FIXED COST?
Total Fixed Cost / Output Quantity
What is the formula for AVERAGE VARIABLE COST?
Total Variable Cost / Output Quantity
What is total productivity (in short term)?
Total number of units/outputs produced with number of employees
Y-Axis - Units produced
X-Axis - Staff hired
Why does an increase in productivity not occur at a constant rate (in short term)?
Because of specialisation and division of labour.
- output increases at an increasing rate because every additional labour produced more than previous worker
What is marginal productivity (in short term)?
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
What is average productivity (in short term)?
The average productivity curve is the average productivity of the marginal productivity of the labour.
What does the slope of the AP curve depend upon (in short term)?
The slope of the MP curve.
When is profit maximised?
When production cost is low and productivity is high
What is SHORT RUN?
Period of time during which at least one input is fixed.
Up to 1 year.
What is LONG RUN?
Period of time long enough to allow a firm to
- vary all inputs
- adopt new tech
- change size of operation
Over one year
What is the TOTAL COSTS?
The costs of all inputs a firm uses in the production
What are VARIABLE COSTS?
The costs which change as the quantity of output changes
What is FIXED COSTS?
The costs that remain constant as the quantity of output changes
What is the formula for total costs?
TC = TFC + TVC
What is OPPORTUNITY COST?
The highest valued alternative that must be given up to engage in an activity
What is EXPLICIT COST?
A cost that involves spending money
What is IMPLICIT COST?
A non-monetary opportunity cost
What is SHORT RUN?
Period of time during which at least one input is fixed.
Up to 1 year.
What is TOTAL COST?
The cost of all factors of production used
What is MARGINAL COST?
The change to TC from producing one more unit/good
What is AVERAGE TOTAL COST?
The total cost divided by quantity
What is TOTAL VARIABLE COST?
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
What is the formula for marginal cost?
MC = change in TC / change in Q
MPL increases, what is the impact on MC?
MC of production decreases
MPL decreases, what is the impact on MC?
MC of production increases
What is the shape of the MC curve? Why?
U-Shaped cos MC decreases then increases.
What is the formula for Average Total Cost?
ATC = TC / Q
What is impact on ATC if MC < ATC?
ATC will decrease
What is impact on ATC if MC > ATC?
ATC will increase
What curve is MC linked to? Why?
MPL curve
If MPL increases then MC decreases
If MPL is at its MAX, MC is at its MIN
What curve is AC linked to? Why?
AP curve
If AP increases then AC decreases
If AP is at its MAX, then AC is at its MIN
In the long run are the resources used by a firm fixed, variable or mixed?
All variable in the long run, so all costs are variable in the long run
In the long run are the resources used by a firm fixed, variable or mixed?
All variable in the long run, so all costs are variable in the long run
What is the LONG RUN AVERAGE COST CURVE?
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
What are ECONOMIES OF SCALE?
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
What is CONSTANT RETURNS TO SCALE?
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
What is MINIMUM EFFICIENT SCALE?
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
What are DISECONOMIES OF SCALE?
These exist when a firms long run average costs rises as increases its scale of production and the quantity of output it produces
What is SHORT RUN?
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
What are fixed costs?
Costs that don’t change with output
What are variable costs?
Costs that change with output
What is LONG RUN?
period of time > 1 year
life is more flexible ‘cost start to plan
no fixed factors of production
all inputs are variable
What is short run costs based on ?
Law of diminishing returns
What is long run costs based on ?
Economies and diseconomies of scale
What is Marginal Cost?
The extra cost of producing an extra unit
Formula for AVC
TVC / Q
Formula for AFC
TFC / Q
Formula for TC
TFC + TVC
Formula for ATC
AVC + AFC
or
(FC/Q) + (VC/Q)
What is Marginal Product
MP is the extract product of employing 1 more worker
Formula for MP
Change in total product / change in labour
What is Marginal Cost?
Extra cost of producing 1 more unit of output
Formular for MC
Change in total cost / change in output
What happens to MP when AP declines? Why?
MP declines.
Cos AP follows MP
What are (3) stages of law of diminishing returns?
- MP increases, TP increases at an increasing rate.
- MP decreases (but still +ve), TP increases at a slower rate
- MP is -ve, TP decreases
When MP = 0, what is TP?
At its MAX
What is the law of diminishing returns?
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)
What does the law of diminishing returns relate to?
Variable Inputs
MP
Define law of diminishing returns
at some point adding more variable inputs to given fixed input will cause the MP to variable input to decline
What is the relationship between cost and productivity?
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
What happens to the average when marginal > average?
Average is pulled up
What happens to the average when marginal < average?
Average is pulled down
Where is MC when productivity (MP) is at its MAX?
MIN
Where is CC when productivity (AP) is at its MAX?
MIN
What is MC curve linked to?
MP Curve
If MP increases, MC decreases
If MP = Max, MC = Min
What is AC curve linked to?
AP Curve
If AP increases, AC decreases
If AP = Max, AC = Min
Formula for AFC
What does this mean for AFC? Describe the curve
TFC / Q
So, as Q increases, AFC decreased
So, the curve is continually decreasing
Formula for AVC
Describe curve
TVC / Q
U-shaped
Formula for ATC
Describe curve
AFC + AVC
U-shaped
What is the distance btw ATC and AVC?
AFC
Where does MC interest ATC?
At ATC’s MIN
Formula for AP
TP / L
Formular for MP
change in TP / change in labour
Formula for TC
TFC + TVC
Formula for AVC
TVC / Q
Formula for AFC
TFC / Q
Formula for ATC
TC / Q
AFC + AVC
Formula for MC
change in TC / change in Q
change in TVC / change in Q
What are economies of scale?
Costs fall as output increases
i.e. increasing returns to scale
What are constant returns to scale?
Cost remains same (ATC)
What are diseconomies of scale?
Cost rises as output increases
What causes economies of scale?
- 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
What occurs when quantity increases and AC decreases?
Economies of scale
What occurs when quantity increases and AC remains constant?
Constant returns to scale
What occurs when quantity increases and AC increases?
Diseconomies of scale
