Short-run Production, Costs, and Revenue Flashcards

Flashcards about Short-run Production, Costs, and Revenue

What is the short-run in economics?

A period where one or more factors of production are fixed and cannot be changed.

What are fixed inputs?

Inputs like machinery or factory infrastructure that remain constant in the short-run.

What are variable inputs?

Inputs like labor or raw materials that can vary in the short-run.

What is the Law of Diminishing Returns?

A concept stating that after a certain level, each additional unit of input contributes less to total output than the previous unit.

How does the Law of Diminishing Returns manifest in the manufacturing sector?

Adding more workers to a machine setup leads to less efficient output per worker.

How does the Law of Diminishing Returns manifest in the agricultural sector?

Excessive use of fertilizer results in a smaller increase in yield and can even harm the crop.

What happens in the Increasing Returns Phase of the short-run production curve?

Each additional unit of input results in a larger output, indicating underutilized resources.

What happens in the Diminishing Returns Phase of the short-run production curve?

Output continues to grow but at a decreasing rate.

What happens in the Negative Returns Phase of the short-run production curve?

The output starts to decrease with the addition of more inputs, showing inefficiency and overutilization.

How does worker productivity influence the short-run production function?

The skill and efficiency of labor significantly impact how long the increasing returns phase lasts.

How do technology limitations impact the short-run production function?

Older technology may limit production efficiency, hastening the onset of diminishing returns.

How do market conditions influence the short-run production function?

Demand and supply fluctuations can impact production decisions in the short-run.

What are Fixed Costs (FC)?

Expenses that remain constant regardless of the level of production, such as lease payments and salaries of permanent staff.

What are Variable Costs (VC)?

Costs that change in direct proportion to the level of production, such as raw materials and wages of temporary staff.

What are Total Costs (TC)?

The sum of fixed and variable costs (TC = FC + VC).

How is Average Fixed Cost (AFC) calculated?

Calculated by dividing fixed costs by the quantity of output (AFC = FC/Q).

What is the general trend of the Average Fixed Cost (AFC) curve?

The AFC curve continuously declines as output increases.

How is Average Variable Cost (AVC) computed?

The variable cost per unit of output (AVC = VC/Q).

What is the general behavior and shape of the Average Variable Cost (AVC) curve?

The AVC curve typically decreases initially and then increases after a certain point.

How is Average Total Cost (ATC) calculated?

The total cost per unit of output (ATC = TC/Q or AFC + AVC).

What is the typical shape of the Average Total Cost (ATC) curve?

The ATC curve is U-shaped in the short-run.

What is Marginal Cost (MC)?

The cost of producing an additional unit of output.

What is the behavior of the Marginal Cost (MC) curve?

The MC curve initially falls, reaches a minimum, and then increases sharply, intersecting both the AVC and ATC curves at their minimum points.

What does the Law of Diminishing Returns state?

Adding more of a variable factor of production to a fixed factor will, beyond a certain point, yield progressively smaller increases in output.

Why is the distinction between fixed and variable costs important?

The distinction between fixed and variable costs is crucial for understanding how total costs change with production levels.

What is revenue?

The income generated from normal business operations, primarily through the sale of goods and services.

What is Total Revenue (TR)?

The entire income a firm earns from selling its products or services.

What is the formula for Total Revenue (TR)?

Price per Unit × Quantity Sold

What is Average Revenue (AR)?

The revenue a firm earns per unit of output sold.

What is the formula for Average Revenue (AR)?

Total Revenue / Quantity Sold

What is Marginal Revenue (MR)?

The additional revenue generated from selling one additional unit.

What is the formula for Marginal Revenue (MR)?

Change in Total Revenue / Change in Quantity Sold

What is the relationship between AR and MR in perfect competition?

AR and MR are equal and constant, reflecting the market price.

What is the relationship between AR and MR in imperfect markets?

MR decreases faster than AR due to price reductions needed to sell additional units.

How does understanding AR help in pricing strategy?

Understanding AR helps in setting prices that maximize per-unit revenue.

How does MR analysis assist in output decisions?

MR analysis assists in determining the most profitable level of production.

What is normal profit?

The breakeven point of a business where total revenue equals total costs (explicit and implicit).

What is subnormal profit?

Total revenue is less than total economic costs, signaling inefficiency.

What is supernormal profit?

Total revenue significantly exceeds total economic costs, often due to a competitive advantage or high barriers to entry.