Flashcards in Microeconomics, Part 3- Production, Costs and Revenue Deck (23)
Division of labour definition:
Breaking down the production process down into a sequence of tasks, with workers assigned to particular tasks.
A worker only performing one task or a narrow range of tasks. Also different firms specialising in producing different goods or services.
What does the division of labour and specialisation to do the PPF?
Labour productivity definition:
Measures the output per worker or per hour worked. Labour productivity = total output per time period / number of units of labour
How can productivity be improved?
-Investment in capital
Fixed costs definition:
Cost which does not change WITH OUTPUT, in the short run (i.e. even if nothing is produced, it must still be paid. For example rent
Variable costs definition:
Cost which changes proportionately with output
Total cost definition:
Fixed costs + variable costs
Total cost / output
What does the graph for average cost look like?
The lowest point is productively efficient because it is working at lowest average cost
Economies of scale definition:
As the scale of production of a firm increases, the long run average costs fall
Long run definition:
All factors of production are variable (including premises)
Short run definition:
At least one factor of production (usually land) remains fixed
Internal economies of scale definition:
Cost savings that result from the growth of the firm itself
Examples of internal economies of scale:
-Research and development
-Financial (Investors and banks are more likely to lend you money)
-Technical (Machines and factories)
-Managerial (more experienced and skilled workers)
-Purchasing (bulk buying)
External economies of scale definition:
Cost saving resulting from the growth of the industry or market of which the firm is a part of
Examples of external economies of scale:
-Research and development by the government
Diseconomies of scale definition:
Where an increase in the scale of production leads to increases in average total costs for firms
What do diseconomies of scale arise from?
-Managerial diseconomies of scale (more difficult to manage)
-Motivational diseconomies of scale (people aren't as motivated because the firm has grown)
Examples of external diseconomies of scale:
What does the average cost graph for internal and external diseconomies of scale look like?
Average cost curve
-Economies of scale: Moves from the left hand side towards the right but not over half way (not past productive efficiency)
-Diseconomies of scale: On the right hand side
What does the average cost curve for external economies and diseconomies of scale look like
The cost curve shifts up (diseconomies) or down (economies)