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Definition
| The name given to that transformation of factors into goods. |
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Term
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Definition
An economic institution that transforms factors of production (inputs) into consumer goods (output, quantity supplied).
They do not necessarily have to produce consumer goods, may be capital goods. |
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| Whether an activity is organized through the market depends on Transaction Costs. What is the definition of transaction costs? |
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Definition
| Costs of undertaking trades through the market (costs of raw material). |
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Definition
| Profit = Total Revenue - Total Costs |
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Definition
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| Total Costs Formula for economists |
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Definition
| Total Costs = Accounting Costs + Opportunity Costs |
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| Along the equilibrium, a firm in perfect competition makes... |
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Definition
| ZERO PROFIT. Normal Rate of Return. |
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Term
| What two types can the Production Process be divided in to? |
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Definition
1. Short Run Decision
2. Long Run Decision |
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Term
| What is a Long Run Decision? |
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Definition
A decision in which the firm can choose among all possible production techniques.
- Can change absolutely everything (including fixed costs) |
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Term
| What is a Short Run Decision? |
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Definition
A decision in which the firm is constrained in regard to what production decisions it can make of whether it should increase or decrease output.
- There is at least one input of factor of production they cannot change (e.g. a lease that is still occurring and must be paid off, cannot changed fixed goods)
- Some outputs are app costly to adjust that they are treated as fixed costs
- Can make some decisions to some extent, but not fully
* The one input that we allow to be changed or varied is labour |
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Term
| Long run and Short run do not necessarily refer to specific periods of time, they refer to... |
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Definition
| The degree of flexibility the firm has in changing the level of output. |
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Term
| What does a Production Table show? |
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Definition
The output resulting from various combinations of factors of production or inputs.
(will concentrate on short-run production analysis in which one of the factors is fixed) |
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Term
| What is the Production Function? |
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Definition
How much outputs you get from what you put in.
- Shows the maximum amount of output that can be derived from a given number of inputs. |
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Term
| What is Marginal Production? |
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Definition
'Extra Production', the additional output from adding one additional worker, other inputs remaining constant.
- Usually talking about marginal production of labour |
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Term
| What is Average Production? |
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Definition
| Calculated by dividing total output by the quantity of the output. |
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Term
What does this Production table show?
[image] |
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Definition
[image]
- Extra output of going from 0 workers to one worker is 4 extra units.
- As you add more and more workers however, the extra output after adding one more worker falls (still getting extra but not as much extra as the worker before)
- Increasing Marginal returns so worth adding worker |
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Term
| Reason as to why Marginal Product begins to decrease as more and more workers are added? |
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Definition
- New workers are not as good as the previous (as skilled workers are hired first)
- May be starting to get overcrowded (happens when Marginal Production becomes negative) |
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Term
| Axis of a Cost Curve Graph |
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Definition
QUANTITY is on the horizontal axis
PRICE is on the vertical axis |
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Term
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Definition
[image]
- Total Variable cost curve has the same shape as the total cost curve is it is TC = VC+FC
- VC always starts at 0 because variable costs only start when you start production
- TC start at FC on the y axis because these have to be paid at 0 production |
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Term
| Example of the Average and Marginal Cost Curves |
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Definition
[image]
- The marginal cost curve goes through the minimum point of the average total cost curve and average variable cost curve.
- Each of these curves is U-shaped. |
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Term
| Downward-Sloping Shape of the Average Fixed Cost Curve |
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Definition
- The average fixed cost curve slopes down continuously.
- It tells us that as output increases, the same fixed cost can be spread out over a wider range of output |
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Term
| What is the only way that output can be changed in the short run? |
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Definition
| by changing the variable input of labour i.e. increasing the number of workers (cannot change machinery or any other) |
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Term
| Reason for Diminishing Marginal Returns |
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Definition
| Eventually the extra output generated by an additional worker gets smaller |
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Term
| The U Shape of the Average and Marginal Cost Curves |
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Definition
- Marginal and average productivities fall and marginal costs rise.
- And when average productivity of the variable input falls, average variable cost rise. |
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Term
| Average Total Cost curve explained in relation to AVC and AFC |
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Definition
| Average total cost curve is the vertical summation of the AVC+AFC, so it is always higher than both of them. |
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Term
| What would happen if the firm increased output enormously? |
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Definition
The AVC curve and the ATC curve would almost meet.
However they will never touch as there will always be the mixed cost added to the ATC. |
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Term
| The Relationship Between Productivity and Costs |
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Definition
- The shapes of the cost curves are mirror-image reflections of the shapes of the corresponding productivity curves.
- When one is increasing, the other is decreasing
- When one is at a maximum, the other is at a minimum. |
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Term
| Relationship Between Marginal (MC) and Average Costs (AC), reason why MC always intersects at AC and AVC lowest. |
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Definition
- When MC exceeds AC, average cost must be rising.
- When marginal cost is less than average cost, average cost must be falling.
e.g. If you have an average mark of 50% and get 80% in final exam, will pull your avg up. But if you get 30%, will pull avg down
- As as MC is larger, AVC must also be increasing and visa versa
- If MC and AC are the same, MC is not pulling AC up or down so intersects |
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Term
| Relationship Between Marginal (MC) and Average Costs (AC) summarised |
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Definition
If MC > AVC, then AVC is rising.
If MC = AVC, then AVC is at its low point.
If MC < AVC, then AVC is falling. |
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