Economies of Scale and Production Possibilities

This set of flashcards covers key concepts related to economies of scale, production costs, and resource allocation as discussed in the provided lecture notes.

What is economies of scale and how does it affect production costs?

Economies of scale refer to the reduction in unit production costs as output increases, achieved by spreading fixed costs over a larger production volume and obtaining bulk discounts from suppliers.

What is the formula for calculating unit production costs?

Unit production costs = unit variable costs + unit fixed costs.

What is meant by variable costs in production?

Variable costs are costs that increase as production volume increases, typically involving expenses that are incurred each time a unit is produced.

What is the breakeven point in economics?

The breakeven point is where price equals unit costs, resulting in no profit being made.

What is the primary distinction between economies of scale and economies of scope?

Economies of scale focus on lowering unit costs by increasing the volume of a single product, while economies of scope involve making multiple products simultaneously to gain efficiency.

What does the Production Possibilities Frontier (PPF) illustrate?

The PPF illustrates the maximum output of two products a company can produce while utilizing all available resources efficiently.

What does it mean when a PPF graph shows points to the right of the line?

Points to the right of the PPF graph indicate unattainable efficiency, as they exceed maximum production capabilities with current resources.

What indicates allocative efficiency in resource use?

Allocative efficiency occurs when resources are used in the most effective way to satisfy consumer preferences.

How does the shape of the PPF affect opportunity costs?

A straight line PPF indicates constant opportunity costs, while a concave PPF reflects increasing opportunity costs.

What is the impact of outsourcing on production costs and market share?

Outsourcing allows businesses to buy inputs from suppliers that can produce more efficiently, lowering production costs and potentially increasing market share.