Microeconomics: Chapter 1- Theory of Production
- 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
- Returns to scale
- 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
- Long Run
- 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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