Production Flashcards
(13 cards)
define returns to scale
refers to how a firm’s output changes given an increase or decrease in factor inputs in the long run
= used to understand long term production capabilities and productive efficiency of firms
define short run
at least one factor of input is fixed
define long run
all factors of input are variable= scale and size of production can change to allow EoS
define constant returns to scale
Output increases in proportion to input increases. For example, if a factory doubles its inputs (labor, capital, etc.), its output will also double
define positive returns to scale
Output increases more than proportionally to input increases. For example, if a factory doubles its inputs, its output may more than double
= leads to internal EoS= falling unit costs= decrease LRAC
define negative returns to scale
Output increases less than proportionally to input increases. For example, if a factory doubles its inputs, its output may increase by less than double
= leads to internal DEoS= increase LRAC
define the law of diminishing marginal utility
if the consumption of a good increases, the satisfaction derived gradually increases but at a decreasing rate to the point that it reaches 0
describe the PPF
- combination of 2 products which shows the maximum output combination, using all of the available FOP efficiently
- if it lies on the PPF curve, its efficient
- if its inside the curve, its inefficient as not all resources are fully utilised or resources are left unemployed/ used inefficiently
- if its outside the curve, are unattainable at the moment
= country would need to increase its factor resources to improve tech or productivity to achieve outward PPF shift - trade between countries allows nations to consume beyond their own PPF potentially leading to gains in economic welfare
- producing more of both goods w same resources represents an improvement in welfare and gain in AE
- can show OC of producing good A and therefore sacrificing some good B due to diminishing marginal returns
= extra output of good A decreases as more resources are allocated to it
how to cause outward shift of PPF
- changes in production tech or increasing factor inputs
= after the shift, more capital goods can be supplied for each level of output for consumer goods= improve economic welfare - more efficient workers= increase output per worker= increase production of each input used
- better management of factor inputs= improve quality and reduce wasted resources
- more resources available e.g. investment would increase stock of capital or inward migration would increase labour force size
why would PPF shift inwards
- damaging effects of severe natural disasters e.g. floods or earthquakes
= human and economic costs - destructive effects of civil war= decrease labour force
- large scale outward migration of labour due to economic recession which might cause brain drain of skilled workers
- fall in productivity= if workers are working with old, breaking capital, productivity would suffer e.g. country with poor infrastructure that could cause blackouts, congestion, delays in logistics etc
define resource depreciation
when existing resources become less productive due to wear and tear of age
= machinery, skills e.g. long term unemployment causes lower productivity, old buildings and infrastructure like capacity limits, constant breakdowns etc
define resource depletion
cause of inward shift in PPF= people leave country (called human capital flight), factors could be wiped out by natural disasters or man-made problems like deforestation
economic cycle and PPF
- during a recession, output would be inside PPF due to high unemployment, under utilised capital resources etc= inefficiency
- during economic recovery, AD will be rising= leads to increase in real national output and a fall in amount of spare capacity
= BUT still within PPF not on the curve
