Theme 3 Textbook Flashcards
Define short-run
A period where a firm can only vary one factor of production
Define long-run
A period where a firm can vary all its factors of production
Define law of diminishing marginal productivity
If a firm increases one factor of production
It will eventually derive diminishing marginal productivity of the variable factor
Define fixed costs
Costs that do not vary with level of output
Define variable costs
Costs that vary with level of output
Define average costs
Total cost / quantity produced
Define marginal cost
The cost of producing an additional unit of output
Define economies of scale
When an increase in a firms scale of production leads to production at lower long-run average cost
Define management economies of scale
Economies of scale that arise when a larger firm is able to rationalise its management structure
Define financial economies of scale
Economies of scale that arise when a larger firm is able to borrow at a lower interest rate
Because of its size
Define purchasing economies of scale
Economies of scale that arise when a larger firm can obtain better terms from its suppliers
Define technical economies of scale
Economies of scale that arise when increasing size allows improved technical efficiency
Define productive efficiency
- When firms produce the maximum possible output from its factors of production
- MC=AC
Define constant returns to scale
When long-run average costs remain constant with an increase in output
Define diseconomies of scale
When an increase in the scale of production leads to higher long-run average costs
Define minimum efficient scale
The level of output at which long-run average costs stop falling as output increases
