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production converts inputs into…
outputs
inputs are..
factors of production
outputs are…
goods and services
Productivity is…
how efficiently we use inputs to produce outputs
What is the short run?
a period of time during which at least one factor of production is fixed (e.g. land or capital)
What is the long run?
a period of time where it is possible for firms to vary all factors of production
What are the short-run costs firms face?
Fixed and Variable Costs
Fixed costs
cost that do not vary with output
Variable costs
costs that vary directly with output.
Example of fixed costs
rent (e.g. land), interest on loans, insurance costs etc.
Example of variable costs
raw materials and some labour costs if they are paid per unit of output produced
Total Costs =
Fixed Costs + Variable Costs
Average Fixed Cost (AFC) =
TFC / Q
Average Variable Cost (AVC) =
TVC / Q
Average Total Cost (ATC) =
TC / Q
Marginal revenue (MR)=
ΔTR/ ΔQ
The relationship between ATC and MC
If the marginal is below the average, the average falls and if the marginal is above the average the average rises
Total revenue is…
the total amount of money that a firm receives from selling a certain amount of a good or service in a given period of time.
Average revenue is…
the revenue a firm receives per unit of its sales.
Marginal revenue is…
the extra revenue that a firm gains when it sels one more unit of a product in a given time period.
labour productivity is…
the output per worker
capital productivity is…
output per unit of capital
productivity gap
the difference between labour productivity in the UK and in other developed economies
specialisation
a worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services.
division of labour
this concept goes hand in hand with specialisation. Different workers perform different tasks in the course of producing a good or service.
trade
the buying and selling of goods and services exchange
exchange
to give something in return for something else received. Money is a medium of exchange.
short run costs is…
a period of time during which at least one factor of production is fixed (for example land or capital) whereas in the long-run it is possible for firms to vary all factors of production.
fixed costs
These are costs that do not vary with output.
Total Costs =
Fixed Costs + Variable Costs
Average Fixed Costs (AFC) =
TFC / Q
Average Variable Costs (AVC) =
TVC / Q
Average Total Cost (ATC) =
TC / Q
Marginal Cost (MC) =
∆ TC / ∆Q
TR =
P x Q
Average Revenue
This is the revenue a firm receives per unit of its sales.
AR =
TR/Q or P
MR =
ΔTR/ΔQ
Relationship between MR and TR
When MR is positive and falling the TR is rising at a decreasing rate
When MR is a negative and falling the TR is falling
When the MR is zero, TR is a maximum
Economic Profits are…
the difference between total revenues and the total economic costs of production
In the long run…
all factors of production are variable and therefore all costs are variable
Economies of Scale
an increase in inputs leads to a % increase in output with the result that the long-run average cost falls
Constant Returns to Scale
an increase in inputs leads to same % increase in output with the result that the long-run average remain the same
Diseconomies of Scale
an increase in inputs leads to a smaller % increase in output with the result that the long-run average cost rises.
The minimum efficient scale is…
the scale of output where internal economies of scale have been fully exploited and the LRAC is at a minimum
If the MES is small relative to the total market size…
then a number of small firms can exist and be considered efficient
MES - Natural Monopoly
This is when the MES is extremely high compared to the market size and it is likely that only one firm can exist
Internal Economies of Scale
refer to cost savings made by an individual firm as they expand their scale of production. (They are only experienced by the individual firm who is expanding). They result in a movement along the LRAC curve.
External economies of scale
Types of Internal economies of scale
Technical economies of scale
Managerial economies of scale
Marketing/Purchasing economies of scale*
Financial economies of scale
Risk-bearing economies of scale
Technical economies of scale
Managerial economies of scale
A large firm can afford to employ specialist managers who can perform their tasks more efficiently. For example an accounts manager, marketing specialist, production manager. In a small form all these tasks may need to be performed by one person.
Marketing economies of scale
Financial economies of scale
Risk-bearing economies of scale
What are the benefits in terms of lowering average costs of the development of these specialist areas?
How can a firm reduce the average costs of production as a result of producing a range of products ? (Like Amazon)
They have a huge output; risk-bearing
These business can use one finance, marketing, technology department. Can spread the costs over many different products. Even the packaging can be versatile.
Internal diseconomies of scale involve …
either technical constraints on the production process that the firm uses or organizational issues that increase costs or waste resources without any change to the physical production process.
External diseconomies of scale are…
costs which are outside the control of a single firm and result of the growth of a specific industry
An internal economy of scale measures …
a company's efficiency of production. That efficiency is attained as the company improves output when the average cost per product drops.