Year 12 Work Flashcards
(30 cards)
Long run definition
A time period where all the factors of production and costs are variable
Total product definition
Total output produced by workers
Average product definition
No. Of workers
Marginal product definition
The output produced by 1 extra worker
Change in total product
—————————
Change in variable input
Law of diminishing returns
Occurs in the short run
As the number of employees increases, the marginal product of the extra employee will at some point be less than the MP of the previous employee. This is because workers are less efficient, output lowers and marginal costs rise
Graph for AP/MP
‘n’ shaped
Marginal product begins higher than average product but cuts through
Relationship between total product and marginal product
Total product peaks at the point marginal product = 0
Because 1 more worker beyond that point has a negative marginal product and therefore reduces the total product
Relationship between AP/MP
Average product peaks when it intersects the marginal product curve
Fixed costs definition + examples
Business expenses that do not vary directly with the level of output
E.g. Rent of buildings, with 1 or 10 desks in the office, the rent will remain constant
Variable costs definition + example
They vary directly with output
E.g. Raw material costs or wages of part time staff
Average variable costs =
Output
Marginal costs
Change in total costs from increasing output by 1 extra unit
When is total revenue maximised?
When marginal revenue = 0
Lowest point on the LRAC curve =
Most productively efficient (MES, minimum efficient scale)
Increasing returns to scale
= economies of scale
LRAC will be falling
Constant returns to scale
LRAC will be constant
Decreasing returns to scale
= diseconomies of scale
LRAC will be rising
Internal/ external economies of scale
Internal = firms benefiting from lower production costs due to an improvement within the company
E.g. Bulk buying/ Henry fords production line
External = firms benefiting from lower production costs due to larger changes outside the company
E.g. Decrease in interest rates
Technical economies of scale definition
Increase in specialist capital for firms as they increase in size. This lowers the average cost of production
Marketing economies of scale definition
Large firms spend more on advertising, so the spending can be spread over the huge volume of sales
Financial economies of scale definition
Larger firms have access to cheaper sources of finance (interest rates) as they offer more security- they have more fixed assets and are considered low risk
Managerial economies of scale definition
Savings in administrative costs by splitting up jobs
E.g. Specialist managers
Purchasing economies of scale definition
Buying in bulk can benefit large companies as they get a better discount
Profit =
Output x price
