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Economics ­ The Theory of Production (10.12.12)

The Theory of Production
Production in the short run:

In the short-run, at least one factor of production will be fixed (e.g. size of premises)

For the firm to increase output they will take on extra workers up to a point, that each…

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Relationships ­ ATC, AVC, AFC, MC:

AFC fall as output rises ­ The fall is very rapid as fixed cost is spread over more units ­
this will reduce the cost of producing the extra unit
The falling AFC pull the MC curve downwards (Cost of producing an additional unit…

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Production in the long run:

Firms can temporarily overcome the problem of diminishing returns ­ it can vary its fixed
factors e.g. could move to larger premises

The problem of diminishing returns re-emerges as soon as the fixed factor becomes
overloaded; though specialisation can delay diminishing returns from setting in…

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The Minimum Efficient Scale:

When a firm has grown large enough to have exploited all of the benefits of internal
economies of scale it has reached the minimum efficiency scale (The lowest point of the
LRATC curve)

There is unlikely to be a single level of output whereby costs are…




This is a 4 page summary of the main concepts of costs, revenue, economies of scale and efficiency. Quite concise but explains it well.

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