Theme 3 Flashcards
Labour and capital are regarded as what kind of factors?
Labour - variable factor
Capital - fixed factor
Define short run
Period over which a firm is free to vary the input of one of its factors of production, but faces a fixed input in the other
Define long run
The period over which the firm is able to vary the inputs of all its factors of production
Define law of diminishing marginal productivity
If a firm increases its inputs of a variable factor while holding inputs of a fixed factor, it will derive less additional output per unit of labour
Define total fixed costs
Costs that do not vary with the level of output
Define total variable costs
The sum of costs that vary with the level of output
Total costs formula
Total fixed costs + total variable costs
Examples of fixed costs
Leasing a piece of machinery
Renting a factory
Examples of variable costs
Operating costs
Wages to short-term contract staff
Why does total costs increase as the volume of production increases
More of the variable input is needed to increase output
Define allocative efficiency
When resources are used to produce goods and services which consumers want and social welfare is maximised
When does allocative efficiency occur
P=MC
Define productive efficiency
Producing at the lowest cost per unit
When does productive efficiency occur
MC=AC
Define dynamic efficiency
When resources are allocated efficiently over time
