Production, Costs and revenue Flashcards
(45 cards)
Define Marginal Returns of labour
The addition to total output brought by adding 1 more worker to the labour force
What is the law of diminishing marginal returns
When an increasing amount of a variable factor is added to fixed factors and the amount added to total product by each additional unit of the variable factor eventually declines
What are the assumptions of the law of diminishing marginal returns
It’s in the short run, firms have fixed factors of production and state of technology is constant
What context is the law of diminishing marginal returns usually used in
Adding an increasing amount of labour to a fixed amount of capital
Diagrams for law of diminishing marginal returns
Beige color is diminishing marginal returns
Instead of product, say returns
In the blue parts, workers start to get in each others way
Define returns to scale
The rate by which output changes if the scale of all the factors of production is changed
Define increasing returns to scale
How does this affect the LRAC
When the scale of all the factors of production employed increases, output increases at a faster rate
So costs are rising, but output is rising at a faster rate, so LRAC falls, this is economies of scale
Define Constant Returns to scale
When the scale of all the factors of production employed increases at the same rate
Define Decreasing returns to scale
When the scale of all the factors of production employed increases, output increases at a slower rate
Costs are rising, but output is rising at a slower rate
So average costs are rising, this is diseconomies of scale
What is a plant
An establishment, such as a factory, workshop or retail outlet owned and operated by a firm
Explain firm growth in terms of returns to scale in the long run
What diagram can be used to show this
Initially, a firm can increase production in the short run by just adding variable factors of production.
However, after a point, short run diminishing marginal returns may kick in, so the firm will take the long run decision to invest in a larger production plant - increasing its plant size, hence having more fixed factors of production
Then the same thing will happen again in the short run with this now larger plant size
Returns to scale are about how much output changes once the plant size is increased
What does plant size represent
Let plant size be the size of a firms fixed capital. So it cannot be changed in the short run.
The plant size also represents the total cost, so increasing plant size increases average cost
What is the minimum efficient scale
The minimum output required to exploit full economies of scale
After this output, costs won’t go any lower
Diagram to explain Long run Production Theory
Left side of blue line is Q* = Minimum Efficient Scale
Define Optimum firm size
The size of firm capable of producing at the lowest average cost and thus being productively efficient
Name 4 types of diseconomy of scale
Control
Communication
Coordination
Motivation
What are external economy of scale
A fall in long run average costs of production resulting from the growth of the market or industry in which the firm is a part
What are external diseconomy of scale
An increase in long-run average costs of production resulting from the growth of the market or industry of which the firm is a part
Give an explanation for the variability in the size of firm in different market/industry structures
The existence/non-existance of increasing returns to scale
In some markets, the LRAC curve is horizontal - Large, small, medium firms can co exist and none have an advantage
In some markets, such for personal services (Personal trainers, hairdressers), economies of small scale production mean the LRAC curve is skewed to the left
Total costs diagram
The difference between TC and TVC is the TFC, as you can see, the distance between the lines is constant
Fixed costs - costs that don’t change with output
Explain the shape of the TVC curve
Costs that change with output
Assume the only cost of production is wages
Let point A be when the line is flat
Before A, there are increasing marginal returns, adding 1 extra worker(increasing cost) causes a larger increase in output
This gets very large around point A when the line is almost flat
After A, diminishing marginal returns kick in, workers start to get in each other’s way. Adding an extra worker(increasing cost) will decrease the increase in output produced
Diagram for Marginal cost and Average Cost
Explain the MC/AC diagram
Due to the law of diminishing marginal returns
When average cost is falling
Increasing Marginal Returns to scale, each extra worker is producing more, but costing the same, so average cost, marginal cost falls
When average cost is rising, there are decreasing marginal returns to scale
Each extra worker is producing less but costing the same. soo marginal/average costs rise
What are the revenue curves in a PCM
Explain them
You can draw them on 1 diagram
Firms are price takers
Regardless of the no.of units, the price and so revenue of each unit is the same - so AR and MR won’t change
So TR will increase by the same amount each time
