Theory of the firm .1. Flashcards
(26 cards)
short run
when one factor of production is fixed
long run
when all factors of production are variable
fixed costs
dont change as output change and cannot be changed quickly and easily
variable costs
do change as output changes and do get changed quickly and easily
law of diminishing marginal returns
states that if a firm adds successive units of variable factors whist the fixed factor of production is held constant, it will eventually lead to diminishing marginal returs. INCREASE IN THE OUTPUT WILL GET SMALLER AND MAY TURN NEGATIVE.
example of fixed and variable costs
fixed :
pizza oven, machinary, rent
variable :
ingredience, raw materials and labour
what is total cost
cost of producing any given level of output
TC = TVC + TFC
TC = AC x Q
what does the cost curve look like ?
TC and TVC increases at the same rate but the defference between the two is the TFC. TFC is a flat line
what is marginal cost
marginal cost the the extra cost to produce an extra unit of output. It is the change in TC / change in output.
what does the average cost curve with MC curve look like
U shaped ATC and AVC, the space between them is the AFC which gets increasingly smaller. J shaped MC curve, MC falls due to specalisation, and then rises to to the law of diminishing marginal returns, productivity falls due to insufficient capital equipment to go around all the workers.
- MC curve cuts ATC and AVC at their loswest points
economies of scale
EoS is a fall in long run average costs as output rises
sources of internal economies of scale
fall in long run average costs as output rises due to advantages internal to the firm. MOVEMENT ALONG THE LRAC CURVE.
.
caused by Really Fun Mums Try Making Pies :
- financial economies of scale = large firms are considered more credit worthy so banks give them greater loans with lower interest rates
- Purchasing economies of scale = firms bulk buy which allows them to negotiate lower unit costs
- marketing economies of scale
- Specialisation of the workforce
sources of internal diseconomies of scale
rise in LRAC as output rises and firms expand beyond its optimum size. (too big too quickly)
THE 4 C’s:
- Control = difficult to monitor productivity of all employees (so they slack)
- Coordination =
- Communication = leading to poor decision making or clashes leading to decreased productivity
- Co-operation = workers loose motivation, not feeling important in a big organisation
methods to avoid diseconomies of scale
- performance pay schemes
sources of external economies of scale
falling LRAC as output rises, shown by the shift downwards of the LRAC curve, which results from a growth in the size of the industry within which the firm operates
GROWTH OF AN INDUSTRY:
- better transport network
- research and development
- lower training costs
- advancements in technology
sources of external diseconomies of scale
rising cost of production, shown by a shift upwards in the LRAC curve which results from a growth in the size of the idustry beyond its optimal size
whats the relationship between the SRAC curves and the LRAC curve
multiple SRAC curves make up the LRAC curve.
- If a firm invests in new capital the srac curve will shift to a new position
revenue
revenue is the income a firm recieves from selling its output
marginal revenue
the change in revenue for selling an extra unit
TR, AR and MR curve for price takers
positive diagonal TR curve, whilst AR = MR = D ,and is perfectly elastic
TR, AR and MR curve for price makers
AR diagonal downwards doesnt quite touch 0, MR diagonal downwards reaches negative, TR rainbow shape
when is revenue maximised
when MR =0
profit
total revenue - total cost
financial cost
costs paid out by the firm (e.g. rent, wages and raw materials)
