Short run/long run Flashcards
Short run
-period of time when atleast one FOP is fixed
-only operating decisions are made
- law of diminishing returns/diminishing productivity
-used in production process
Long run
-period of time when all FOPs as well as tech are variable. The long run will permit new firms to enter, existing firms to expand/contract or close down
-planning decisions are made
- law of returns to scale operates
Economies of scale (Long run)
Creates the cost saving that a firm benefits from by expanding its scale of production in the LR
Internal EoS: relate to the growth of a single firm.
relate to the growth of an industry where all firms in that industry benefits eg. Building of an airport benefits all firms in the tourism sector.
External Eos: all firms benefit
Changes in the costs per units as the number of units are increased
Diseconomies of scale
arise when a firm becomes too large and the production of additional units lead to an increase in costs.
External Dos: cost of all firms increase
When all FOP’s increase in the long run
This is referred to as an increase in the scale of production
What is returns to scale
The effect of an increase in the scale of production on output
Increasing returns to scale
when output>input
Decreasing returns to scale
When output<input
Constant returns to scale
output=input (proportionately)
A firm that has increasing returns to scale
may not have e.o.s because even though output increased at a higher rate than input, scarcity of resources may have resulted in higher raw material cost and therefore a higher cost per unit
Capital intensive
a productive process that required a high percentage of investment in fixed assets to produce (business processes or industries that require large amounts of investment to produce a good or service and thus have a high percentage of fixed assets)
Capital intensive investment=
low labour inputs but high labour productivity, therefore the productive process will have e.o.s (increased output leads to lower avg. cost)
