Rational Producer Behaviour Flashcards
Explicit costs
Actual expenses a firm incurs
Implicit costs
Potential income given up in order to operate a firm
Revenue
Income earnt by the firm from its business activities
Profit
Profit occurs when total revenue is greater than total costs.
Short run
When a factor of production is fixed and others are variable
Long run
All factors of production are variable
When does the law of diminishing return apply?
In the short run
Accounting profit
Total revenue - explicit costs
Economic profit
Accounting profit - implicit costs
Diminishing returns
Production is increasing but at a diminishing rate
Increasing return
When total product is increasing at an increasing rate and marginal product is increasing
Negative return
Total product decreases, marginal product is negative
When MP>AP
AP increases
When MP<AP
AP decreases
When will MP intersect AP
AP’s maximum point
Costs of production
Any inputs into the production of goods and services is considered costs
Fixed cost
Costs that stays the same regardless on how much is produced (rent, interest on loan)
Variable cost
Costs which will change as production levels change. (materials, wages, electricity)
When will a firm supply goods?
When price equals AVC
Economies of scale
The decrease in average costs of production due to the increase in production due to gains in efficiency
Economies of scale occurs due to
- Worker specialisation
- Bulk buying
- Financial economies
- Transport economies
Worker specialisation
Jobs are divided up eg division of labour
Bulk buying
Paying less per unit of raw materials
Financial economies
Cost of borrowing interest for a larger firm is less than a smaller firm
