Topic 4 - Production, Costs And Revenue Flashcards
(16 cards)
What does the law of diminishing marginal productivity state?
In the short run when factors f production are added to the fixed factors the total product will initially rise then fall.
what are the reasons why specialisation of labour increase the productivity of a firm
- specialisation of a specific task will increase the output per worker making them more efficient at that specific job.
- time saving since worker doesn’t need to switch between tasks.
- more machinery can be employed for certain tasks.
Define what is meant by the term “labour productivity”
The output per worker
What does the term “short run” mean in economic theory
The time period in which there is at least one fixed factor of production
Difference between fixed and variable costs
Fixed costs are the costs that aren’t affected by the output of goods. (E.g - rent)
Variable costs are directly affected by how much output you produce. (E.g - raw material for the good)
Define economies of scale
The long run average costs (LRAC) decreasing as output increases
What is the benefit of buying in economies of scale
The average cost per unit being lower allows for a larger profit margin for the business and therefore allows dynamic efficiency
Define diseconomies of scale
The increase in Long run average costs due to increasing output too much
What are the causes of diseconomies of scale?
Lack of motivation from workers
Communication is harder through so many links
Harder to control such a large business
Harder to coordinate these links
What is the minimum efficint scale?
- what types of businesses have large Minimum Efficient scales?
The lowest point of the LRAC curve where the firm is producing at the very lowest average cost and therefore maximing profit.
Large scale production businesses often have very high Minimum economies of scale meaning that a lot of units must be produced to reach the lowest point on the average cost curve.
What types of markets operate in high Minimu efficiencies of Scale.
Natural monopolies.
WHAT is the difference between normal and supernormal profit?
Normal profit is the minimum amount of profit to keep a firm within the market and keep in competition with other firms. NORMAL PROFIT DOES NOT ATTRACT NEW FIRMS INTO THE MARKET
Supernormal profit on the other hand, is extra profit over and above normal profit which often attracts new entrants into the market.
What role does profit play in markets?
- incentive to work harder in order to get higher pay
- ## attracts new firms (substitutes) into the market often leading to lower prices
Describe what term we use when a firm minimises average costs of production?
The firm is productively efficient
What possibility does supernormal bring across for a firm
Supernormal profits bring the opportunity of dynamic efficiency - the reinvestment of extra profits back into the business hence growing it and making it more efficient.
What opportunities does technological development bring across:
- Better product quality
- quicker production times
- can lower costs of production
- development of new markets and products.
