Productivity
The amount of goods and services produced per unit of input.
Business owners look at their productivity in order to maximize efficiency and profit.
Importance of Productivity
Fixed Input
an input whose quantity is fixed for a period of time and cannot be varied.
Variable Input
an input whose quantity the firm can vary at any time.
Short Run
the time period in which at least one input is fixed. It reflects ways in which firms respond to changes in output and can increase or decrease output using more or less of some factors.
Long Run
the time period in which all inputs can be varied. This allows the firm to increase its total capacity, not just short term capacity, and it is associated with a change in the scale of production.
Total Product
All of the product a company makes in a given period of time with a given amount of input.
Marginal Output (MPL)
the change in output generated by adding one more unit of input.
Average Product
the average output per unit of the variable input.
Law of Diminishing Returns
as more of one input is added to a fixed supply of other resources, productivity increases up to a point.
Increasing marginal returns
Diminishing marginal returns
Negative marginal returns
Three stages of the law of diminishing returns
Cost of Production
The expenses that a company faces to function and produce its product.
Fixed
Variable
Total
Marginal
Categories of cost of production
TC=FC+VC
How to find total cost
Change in total cost/change in output
how to find marginal cost
ATC = TC/Q
How to find average total cost
AVC = TVC/Q
How to find average variable cost
AFC = TFC/Q
How to find average fixed cost
Perfect Competition
Ideal market structure in which consumers and producers each compete directly and fully under the law of supply and demand.
Monopoly
A single producer controls all production of a good or service.
Monopolistic Competition
Differ from perfect competition in one key aspect, sellers offer different, rather than identical, products.
Oligopoly
a market structure in which a few large sellers control most of the production of a good or service.
The number of firms in the market (one, few, many)
Whether the goods offered are identical or differentiated.
The dimensions looked at when determining market structures
Many buyers and sellers act independently
Sellers offer identical products
Buyers are well informed about products
Sellers can enter or exit the market easily
4 conditions for a market to be perfectly competitive
both buyers and sellers in monopolistic competition compete under the laws of supply and demand.
buyers and sellers acting independently
buyers who are well informed about products
ease of market entry or exit.
similarities between perfectly competitive and monopolistically competitive markets
Sellers offer different, rather than identical, products in a monopolistically competitive market.
differences between perfectly competitive and monopolistically competitive markets
Product Differentiation
a marketing strategy designed to distinguish a companies product or service from others.
Nonprice competition
Companies distinguish their products or services based on characteristics, not price. Strongly utilize advertising.
Brand name loyalty
When people only buy from a specific brand, even though there are other brands offering similar products.
There are only a few large sellers
Sellers offer identical or similar products
Other sellers cannot enter the market easily
3 conditions for oligopoly
Nonprice Competition
Interdependent Pricing
Collusion
Cartels
How oligopolies try to control prices.
There is a single seller
No close substitute goods are available
Other sellers can not enter the market easily.
3 conditions of a monopoly
natural, geographical, technological, government
4 types of monopolies
There is a single large seller that produces a good or service most efficiently.
Often governments will grant these producers exclusive rights which allows them to be the only producer to sell that product in that market.
Natural Monopoly
Monopolies can also form because of market’s potential for profit is limited due to geographic location.
Geographical Monopoly
Occur when a producer develops new technology that enables the creation of a new product or changes the way an existing product is made.
Protected by patents
Technological Monopoly
Any market in which a government is the sole seller of a product is a government monopoly.
Often run monopolies, usually with basic necessities like public utilities.
Government Monopoly
Fixed Cost
Costs that do not change no matter how many goods are made.
Rent
Interest on loans
Property insurance premium
Local and state property tax.
Salaries
Routine wear and tear on machines
Examples of fixed cost
Variable Cost
Change as the level of output changes
Costs of raw materials.
Wages
Examples of variable cost
At least one factor is fixed but all other factors are capable of being changed.
Reflects ways in which firms respond to changes in output (Demand)
Can increase or decrease output using more or less of some factors.
Factors of Short Run
This allows the firm to increase its total capacity, not just short term capacity.
Associated with a change in the scale of production.
The period of time varies according to the firm and the industry.
Factors of Long Run
Marginal Cost
the additional cost of producing one more unit of output.
Business owners will consider varying the amount of their inputs in order to increase productivity.
What will producers do to effect productivity