The Theory of Production - Ch1
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- 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.
- Lowest point on the LRATC (long run average total cost curve).
- 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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