mid term Flashcards
(34 cards)
definition of production
process of using factors of production to produce good and services, where input (the 4) is transformed into outputs (goods & services)
definition of short run
- at least one input is fixed factor (others r variable)
definition of long run
all inputs are variable factors
(longer time period, able to adjust cost as they make adjustments to production)
define law of diminishing return
defn:
- when increasing quantity of variable factor is added to fixed factor, the total output will increase at increasing rate until a certain level of production
- then, total output will increase at a decreasing rate
- meaning marginal product is falling
- only used in short run (at least 1 fixed factor)
explain law of diminishing returns in a table (3 stages)
(1) increasing returns
- at the start, variable factor is added to fixed factor
- marginal product increases, sloping upwards (in table, MP reaches max value, draw a line below it - most optimal point)
- total product increases at increasing rate
- MP is above AP
reason: both fixed and variable factors r being used in better proportions
(2) diminishing returns
- more variable factor is added to the fixed factor
- MP is falling
- total product increases at decreasing rate (in table - TP reaches max value, draw line below the 2nd number)
- MP is below AP
reason: fixed input used in smaller quantity to work the increasing variable input
(3) negative returns
- MP is negative
- TP reached max level, stops increasing, then declines
reason: overcrowding; firms will never operate at this stage
how to calculate explicit cost? (aka direct cost)
- direct payment made by producer for factors of production
- cost incurred when producing G&S
- used for accounting profit
accounting profit= total revenue (p x q) - explicit costs
how to calculate implicit cost?
- cost incurred by producer for using factors of production that belongs to himself
- takes opportunity cost to estimate value of implicit cost (trade-offs, what could’ve been earned)
- used by economists
economic profit = total revenue - explicit cost - implicit cost
what is total fixed cost (TFC)?
- overhead costs in only in short run
- remains constant even if zero output
eg: rent
graph: horizontal straight line
what is total variable cost (TVC)?
- cost for variable input
- cost of input change with output
graph: inverse s-shaped curve
how to calculate total cost (TC)?
short run:
total cost= total fixed cost + total variable cost
long run:
total cost = total variable cost
graph: inverse s-shaped curve
how to calculate average fixed cost (AFC)?
- fixed cost per unit
- AFC will continue to decline with output in short run
graph: hyperbola
average fixed cost = total fixed costs/quantity
how to calculate average variable cost
- variable cost per unit of output
- AVC declines at first, then reaches minimum then increases continuously with output
graph: u-shaped
average variable cost = total variable cost/quantity
how to calculate average cost (AC)?
- cost per unit of output
- AC declines at first, then reaches minimum then increases continuously with output
graph: u-shaped
average cost= total cost/quantity
how to calculate marginal cost (MC)?
- additional cost incurred in producing an additional unit of output
- MC declines at first, then reaches minimum then increases continuously with output
graph: u-shaped
marginal cost = difference of total costs/difference of quantity
what is economies of scale?
benefits & advantages of large scale production
- increasing returns
- decreasing cost
explain internal economies
benefits enjoyed by the firm itself
- average cost declining as output increases (EOS)
- graph: LRAC is downward slopping
> mention movement, LRAC decreases from Co to C1, output increases from Q0 to Q1
> movement on curve, point downwards from a to b
explain the reasons for internal economies of scale
(1) marketing economies
- buy raw materials in bulk
- save unit cost from advertising & packaging
- hv their own sales department
- sell to large qnt to local & foreign market
(2) financial economies
- borrow large amt of $ at lower interest rate cuz sound financial standing
- low cost
- longer maturity period
- no collateral security required
(3) managerial economies
- specialisation of labour
- productivity increases
- lower cost of production
(4) technical economies
- technological improvement
- buy machine that r modern & advanced
- produces at max capacity
- reducing average cost
explain external economies of scale
benefits enjoyed by the entire industry
- average cost of production declining
graph: LRAC curve shifts downwards
> movement, moves from LRAC0 to LRAC1
> at output, LRAC falls from C0 to C1
> reason, due to changes outside the firm
explain the reasons for external economies of scale
(1) economies of concentration
- operate in same area, no need to advertise location (save advertising costs)
- ensures steady flow of demand
- attracts skilled workers & better infrastructure (save fixed costs)
(2) economies of information
- firms cooperate w e/o, set up research facilities & journal publications
- new & info, improve productivity, save costs
(3) economies of marketing
- cooperate w e/o to buy raw materials in bulk
- cheaper price, reduce cost of production
what is diseconomies of scale?
disadvantages of large scale production
- declining returns & increasing cost
explain internal diseconomies of scale
problems faced by the firm itself
- average cost is increasing
graph: LRAC sloping upwards
> LRAC increases as output increases**
> mention movement, LRAC increases from C0 to C1, output increases from Q0 to Q1
> movement on curve, point upwards from b to c
explain the reasons for internal diseconomies of scale
(1) labour diseconomies
- divide labour, work is boring & repetitive
- causes disinterest & reduced productivity
- eventually cost per unit will rise
(2) management problems
- difficult to coordinate large firms
- slower process of decision making
- lower output & higher costs
(3) technical difficulties
- over usage of machine lead to breakdown
- need to repair & replace increases costs
explain external diseconomies of scale
problems faced by the entire industry
- AC is increasing
graph: LRAC is moves upwards
> LRAC is increasing as production increases
> movement, shift upwards from LRAC0 to LRAC1
> at output, LRAC rises from C0 to C1
reason: changes outside the firm
explain the reasons for external diseconomies of scale
(1) concentration problem
- operate same area, traffic congestion when transport goods
- delayed productivity
- increases cost of goods
(2) scarcity problem
- competition among firms to obtain raw materials
- lead to higher demand, increasing prices
- increase cost of production
(3) wage problem
- shortage of skilled worker
- pay higher wages to attract/retain talent
- higher cost
