micro- production, costs, and revenue

total cost equation

• total cost= fixed costs + variable costs

• TC= FC + VC

average cost equation

• average cost= total cost/ quantity

• AC= TC/Q

• average cost= average fixed cost + average variable cost

• AC= AFC + AVC

total revenue equation

• total revenue= price* quantity

define short run

• the period over which at least one factor of production is fixed

• land is usually the most fixed FoP

define long run

• the period over which all factors of production are variable

define fixed costs

• costs that do not vary with output

• examples: rent, salaries, insurance

define variable costs

• costs that vary with output

• examples: raw materials, hourly wages

define normal profit

• minimum return to keep entrepreneur in business

• TR= TC

define supernormal profit

• profit above normal profit

• TR > TC; attracts new entrants

define productivity

• measures how efficiently inputs are converted into outputs

• expressed as output per unit of input per time period

define production

• the process of converting inputs into outputs

define labour productivity

• output per worker per time period

• a key measure of efficiency and competitveness

why is higher labour productivity important?

• lower unit labour costs → improved price competitveness

• higher output from the same workforce → potential for higher wages + greater economic growth

average costs in the short run

law of diminishing marginal returns

• in the short run, as more units of a variable factor (labour) are added to a fixed factor (capital), the marginal (additional) product of the variable factor will eventually decline

explain the shape of the average costs in the short run graph

1. initially, average costs fall as fixed costs are averaged over more units

2. SRAC curve slopes upwards due to the law of diminishing marginal returns

3. adding more variable FoPs (labour) to a fixed FoP yields less and less additional output

acronym for determinants of labour productivity

• CETMWI

• capital per worker, education and training, technology, management quality, working conditions, infrastructure

three consequences of low productivity

• lower wages: workers are paid according to marginal revenue product

• reduced competitiveness: higher unit costs than foreign rivals

• fiscal pressure: less tax revenue per worker for public services

define specialisation

• occurs when individuals, firms, regions or countries concentrate time and effort on producing particular goods or services

define division of labour

• specialisation by worker- each worker performs a specific task in the production process