Unit 7 Types of cost, revenue and profit, short-run and long-run production flashcards

economies of scale

the benefits gained from falling long-run average costs as the scale of output increases

isoquant

a curve showing combinations of labour and capital to produce a given level of output

total product

the total quantity of output produced by a firm using a given amount of inputs in a specific period.

production function

the maximum possible output from a given set of factor inputs

marginal product

the change in output arising from the use of one more unit of a factor of production

law of diminishing returns

In the short run, when variable factors of production are added to a stock of fixed factors of production marginal product will initially rise then fall

average product

total product divided by the number of workers employed; a simple measure of productivity

profit maximisation

the assumed objective of a firm; the difference between total revenue and total cost is at a maximum

fixed costs

costs that are independent of output in the short run

variable costs

costs that vary directly with output in the short run

average fixed cost

the total fixed costs divided by the quantity of output produced, representing the fixed cost per unit.

total cost

the sum of fixed costs and variable costs at a given level of output.

average variable cost

the total variable costs divided by the quantity of output produced, representing the variable cost per unit.

average total cost

the total cost divided by the quantity of output produced, indicating the average cost per unit.

marginal cost

the additional cost incurred when producing one more unit of output, calculated as the change in total cost divided by the change in quantity.

best combination of factors of production for a firm

MPa/Pa = MPb/Pb = MPc/Pc

increasing returns to scale

where output increases at a proportionately faster rate than the increase in factor inputs

decreasing returns to scale

where factor inputs increase at a proportionately faster rate than the increase in output

isocosts

lines of constant relative costs for factors of production

limitations of isoquant analysis

difficulty in determining isoquants due to lack of data or staff knowledge, switching labour in the long run may not be easy, some employers may feel a social obligation to workers and be reluctant to switch labour and capital

minimum efficient scale

lowest level of output at which costs are minimised, the lower the minimum efficient scale, the greater the number of firms in a market

diseconomies of scale

where long-run average costs increase as the scale of output increases

technical economies

the advantages gained directly in the production process through more efficient production methods

purchasing economies

cost savings achieved by bulk buying of inputs, resulting in lower average costs per unit

marketing economies

cost advantages gained by spreading marketing and advertising expenses over a larger sales volume, resulting in lower average costs per unit.

managerial economies

cost savings achieved through effective management practices, leading to increased efficiency and lower average costs, often achieved through hiring expers

financial economies

cost advantages achieved through better financing options and rates (cheaper and better access to borrowed funds), reducing overall expenses and lowering average costs per unit.

internal economies of scale

cost benefits that a firm experiences as a result of its own decision to increase its production,

external economies of scale

cost benefits that accrue to a firm as a result of external factors, such as industry growth or improvements in infrastructure, leading to lower average costs.

external diseconomies of scale examples

traffic congestion which increases distribution costs, land shortages and therefore rising fixed costs, shortages of skilled labour and therefore rising variable costs

total revenue (TR)

a firm’s total sales or earnings over a given period of time

average revenue (AR)

revenue per unit of output

marginal revenue (MR)

the additional or extra revenue gained from the sale of one more unit of output

price taker

a firm that is unable to influence the market price

price maker

a firm that is able to choose what price to sell its goods at in a market

profit

the difference between total revenue and total costs

normal profit

a cost of production that is just sufficient for a firm to keep operating in a particular industry, including opportunity costs

supernormal profit

the profit that exceeds normal profit, total profit - normal profit

subnormal profit

the profit that is less than normal profit, indicating that the firm is not covering its opportunity costs.