Microeconomics: Chapter 1- Theory of Production

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  • Created by: Hemina
  • Created on: 12-04-14 13:36
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  • CHAPTER 1- Theory of Production
    • Long Run
      • Returns to scale
        • Increasing returns to scale
        • Decreasing returns to scale
        • constant returns to scale
      • Fixed factors become overloaded and through specialisation can delay diminishing returns setting in. so firm will increase output over optimal output point
    • Short Run
      • Average Variable Cost
      • Average Fixed Cost
      • Semi Variable Costs
        • covered by fixed and variable costs
        • For example: electricity bills
      • Variable costs
        • Increase in ->raw materials     -> Power     -> Labour
        • zero when theres no output
        • decrease when output rises and falls
      • Fixed Costs
        • Doesn't vary!
        • usually consist of payments on buildings and machinery
        • rents, salaries of permanant workers and depreciation
      • Law of diminishing returns
      • Average Total Cost
      • Marginal Cost
      • AR and MR
        • MR below AR will pull Average down- therefore the AC will fall
        • MC is above theAC then it will pull average up
        • MC will cut the AC at the lowest point
    • The minimum efficient scale
      • when the firm has grown large enough to have exploited all the benefits of the internal economies of scale
      • Lowest point on the LRATC
      • firms unable to reach minimum efficient scale are unlikely to be competitive with others
      • output required to reach MES are:
        • Nature of industry
        • Costs structure
      • Monopolistic structure is likely to be most effective to achieve MES
    • Relationship of SR and LR
      • Firms typically smaller ones may decide that expansion is not an option and will remain at their present size and overwork their fixed factors
      • Due to these reasons
        • lack of available finance
        • likelihood of planning application being granted
        • fear that market growth is temporary
  • Short Run
    • Average Variable Cost
    • Average Fixed Cost
    • Semi Variable Costs
      • covered by fixed and variable costs
      • For example: electricity bills
    • Variable costs
      • Increase in ->raw materials     -> Power     -> Labour
      • zero when theres no output
      • decrease when output rises and falls
    • Fixed Costs
      • Doesn't vary!
      • usually consist of payments on buildings and machinery
      • rents, salaries of permanant workers and depreciation
    • Law of diminishing returns
    • Average Total Cost
    • Marginal Cost
    • AR and MR
      • MR below AR will pull Average down- therefore the AC will fall
      • MC is above theAC then it will pull average up
      • MC will cut the AC at the lowest point

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