MICRO - costs, revenues and profit ✅ Flashcards
(46 cards)
what are the types of production
Short run production – at least one fixed factor input (usually capital eg machinery/technology) in short run business output expands when more variable factors brought into use
Long run production – all of the factors of production can change (variable) allowing business to change scale of operations
LENGTH OF TIME BETWEEN SHORT/LONG RUN VARIES IN INDUSTRIES
what is productivity
- Measure of efficiency by output per person employed
- Better measure of productivity is total factor productivity, taking into account the changes in amount of capital and labour force
- more productive = lower average costs per unit of output
what does higher productivity lead to (4)
- Improved competitiveness and trade performance = reduced international prices
- Higher profits = can be reinvested into long term growth
- Higher wages = when linked with marginal revenue productivity theory, productivity is rewarded with higher wages
- Economic growth = increase in trend rate
what is the law of diminishing returns
- occurs in the short run
- The variable factor could be increased in the short run (eg. firms might employ more labour)
- Over time, labour will become less productive, so marginal return of the labour falls and an extra unit of labour adds less to the total output than the unit of labour before
- Therefore, total output still rises, but it increases at a slower rate linking to productivity
what does the law of diminishing returns assume
Law assumes firms have fixed factor resources in the short run and that the state of technology remains constant
However, the rise of out-sourcing means that firms can cut their costs and their production can be flexible
what is the difference between total, marginal and average product
TOTAL PRODUCT (returns) = total output/units produced
MARGINAL PRODUCT = additional output produced when extra worker (or factor of prod.) employed
AVERAGE PRODUCT = total output / number of workers (productivity)
when marginal product of extra labour falls marginal cost of supplying extra output increase
what are returns to scale
refers to change in output of a firm after increase in factor inputs
what are increasing returns to scale
when output increases by greater proportion to increase in inputs
when % change in output > % change in inputs
what are decreasing returns to scale
when % change in output < % change in inputs
output increases by smaller proportion to increase in inputs
linked to diseconomies of scale, occurs when firms become less productive
what are constant returns to scale
when output increases by same amount that input increases by
% change in outputs = % change in inputs
what is the difference between fixed and variable costs
- fixed costs dont vary with output eg rents, advertising. theyre indirect
- variable costs change with output, direct costs. eg raw materials cost. Q increase = TVC increase
what is the difference between average variable costs, total costs, average costs and marginal costs
average variable costs (AVC) = total variable cost / output
total costs = total variable costs + total fixed cost
average costs = total costs / quantity produced
marginal cost of production is the cost of producing one extra unit of output
what shape is the average total costs curve
ATC curve = U shaped due to diminishing returns because factors are fixed
at one point, employing more resources is less productive = marginal output decreases per extra factor of production and marginal costs increase
what is the shape of the long run cost curve
- initially average costs fall = economies of scale = falling average costs as output increases
- after optimum level of output, point of lowest average costs, the average costs rise due to diseconomies of scale
in long run, all factors of production assumed to be variable = scale of production can change
how do factor prices and productivity affect a firm’s costs of production and choice of factor inputs
- if factor inputs more productive, firms can produce more output with a smaller input. This results in lower unit costs of production.
- As the average cost per unit of one factor input rises, such as labour, firms are likely to switch to cheaper (and generally more productive) factor inputs, such as capital
what is the shape of the AVC curve
average variable cost (AVC) is variable cost per unit of output
shape of AVC determined by shape of marginal cost, rising MC due to diminishing returns
average fixed costs fall continuously as output increases because total fixed costs spread over higher level of production
AFC difference between AC and AVC
what is the impact of increased fixed costs
increased fixed costs = upward shift in ATC doesn’t cause marginal cost curve to change
changes in fixed costs only causes AC curve to shift not MC but variable costs changes shift both
what is an internal economy of scale
- occur when firm becomes larger
- average costs of production fall as output increases
what is the mnemonic for internal economies of scales examples
Really Fun Mums Try Making Pies
RISK-BEARING: larger firms can expand production range, uncertainty costs spread
FINANCIAL: banks willing to lend loans cheaper to large firms, less risk
MANAGERIAL: larger firms able to employ specialist managers and supervisors, lowering average costs
TECHNOLOGICAL: larger firms can invest in productive machinery and capital, lowering average costs
MARKETING: larger firms divide marketing budgets so average cost of ad per unit is less
PURCHASING: larger firms can bulk-buy, each unit will cost less if it has monopsony power
NETWORK ECONOMIES OF SCALE: gained from expansion of ecommerce, large online shops can add extra goods/customers at low cost
what are examples of technical economies of scale
EXPENSIVE (indivisible) capital inputs: large scale businesses affording investment in specialist capital machinery
SPECIALISATION OF THE WORKFORCE: larger firms splitting production processes into different tasks to boost productivity
LAW OF INCREASED DIMENSIONS (container principle) : linked to cubic law where doubling height and width leads to a more than proportion increase in cubic capacity
LEARNING BY DOING: average production costs declining as production experience means businesses cut waste and find most productive way of producing output on bigger scale
what are external economies of scale
occur within the industry, lowering many unit costs
entire LRAC curve will shift DOWNWARDS
eg local road improvements = reduced costs for local industries
what are diseconomies of scale
occur when output passes a certain point (decreasing returns to scale) and average costs start to increase per extra unit of output produced
why do diseconomies of scale occur
Control: It becomes harder to monitor how productive the workforce is, as the firm becomes larger
Coordination: It is harder and complicated to coordinate every worker
Communication: Workers may start to feel alienated as the firm grows. could lead to falls in productivity and increases in average costs, they lose their motivation
what are the effects of diseconomies of scale
- business moved beyond optimum size
- productive inefficiency suffered
- highly skilled workers may leave
- lower worker morale = lower productivity = increased unit costs = reduction of total profits = possible raised prices to cover costs
- declining market share if competitiveness lost
- rise in firms long run average cost of production
