3.3 Revenues, Costs and Profits

production

process that converts inputs into outputs

productivity

increasing outputs from existing inputs

short run

a time period in which at least one factor of production is fixed

long run

a time period in which the scale of all factors are variable

factors of production

land, labour, capital and enterprise

the law of diminishing returns

short run concept - as more and more of a variable factor (labour) is added to a fixed factor (land/capital), eventually the marginal returns of the variable factor begin to fall

fixed costs

costs that dont change depending on output

variable costs

costs that change depending on output

average costs

total costs/output

marginal costs

cost of producing one more good

change in costs/ change in quantity

total costs, variable costs and fixed costs graph

marginal costs and average costs short run graph

why is the graph a curve

due to the law of diminshing returns

productive efficieny

when marginal costs = average costs

why does marginal costs hit average costs at its lowest point?

because of the relationship between them:

when marginal costs are below average costs it brings the average down

when marginal costs are above average costs it brings the average up

therefore the point of intersection is the minimum point of the curve

returns to scale

how a firm's output changes when all inputs are increased proportionally

increasing returns to scale

a situation where output increases by a greater proportion than the increase in inputs

constant returns to scale

a situation where output increases by the same proportion than the increase in inputs

decreasing returns to scale

a situation where output increases by a smaller proportion than the increase in inputs

marginal costs and average costs long run graph

what is the long run curve made up of

small short run curves which represent a paticular size of the firm

economies of scale

cost advantages of a firm being large

diseconomies of scale

cost disadvantages of being large