The Theory of Production - Ch1

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  • Created by: sammilaw
  • Created on: 19-10-15 19:38
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  • The Theory of Production
    • SHORT RUN: 1 factor of production is fixed.
    • LONG RUN: All factors of production are variable.
    • MINIMUM EFFICIENT SCALE
      • Lowest point on the LRATC (long run average total cost curve).
        • Also the output of LR productive efficiency.
      • Firms unable to reach the MES will not be competitive.
    • AVERAGE AND MARGINAL COSTS
      • MC must cut ATC at the lowest point.
      • When MC > ATC, AC is rising.
      • When MC < ATC, AC is falling.
      • When MC = AC, AC does not change.
    • LAW OF DIMINISHING MARGINAL RETURNS
      • Where increasing amounts of a VF are added to a FF and the amount added to total product by each additional unit of the VF eventually decreases.
      • Takes place in the SHORT RUN.
      • CRITICISMS:
        • How realistic is this situation? Businesses would try to avoid this.
        • Globalisation: the ability to source inputs (i.e. workers) from more than one country and engage in transfers of business technology.
        • Many businesses are multi-plant. They can switch output to meet changing demands in different locations.
        • Government helps to overcome this.
    • Chapter 1

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