# Production, costs and revenue

Definition of a firm
A productive organisation which sells its output of goods or services commercially
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What is the short run?
At least one of the FOP is fixed and cannot be varied
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What is the long run?
All FOP can be varied
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Marginal returns of labour
Change in the quantity of total output resulting from the employment of one more worker
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Law of diminishing returns
SR-as a variable FOP is added to a fixed FOP, eventually MR and AR to the variable factor will begin to fall
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Average returns of labour
Total output/Total number of workers employed
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Total returns of labour
Total output produced by all the workers employed by a firm
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The law of diminishing returns diagram
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What happens when marginal returns > average returns
AR increases
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What happens when marginal returns < average returns
AR Decreases
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What happens when marginal returns = average returns
AR is constant
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Productivity
Output per unit of input
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Labour productivity
Output per worker
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Returns to scale
LR-Rate at which output changes if the scale of all the FOP is changed
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Increasing returns to scale
When the scale of all the FOP employed increases, output increases at a faster rate
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Constant returns to scale
When the scale of all the FOP employed increases, output increases at the same rate
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Decreasing returns to scale
When the scale of all the FOP employed increases, output increases at a slower rate
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Economy of scale
As output increases, LRAC falls
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Diseconomy of Scale
As output increases, LRAC rises
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Long-run average cost
Cost per unit of output incurred when all FOP can be varied
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Increasing returns to scale lead to
Falling LRAC or EOS
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Decreasing returns to scale lead to
Rising LRAC or EOS
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Optimum firm size
The size of firm capable of producing at the lowest average cost and thus being productively efficient
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Minimum efficient scale
The lowest output at which the firm is able to produce at the minimum achievable LRAC
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Economies and Diseconomies of scale diagram
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Internal economies and diseconomies of scale
Changes in LRAC of producing resulting from changes in the size of a firm
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External economy of scale
Fall in LRAC of production resulting from the growth of the market
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External diseconomies of scale
Increase in LRAC of production resulting from the growth of the market
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Marginal cost
Addition to total cost resulting from producing one additional unit of output
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Average fixed cost
Total fixed cost/Quantity
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Average variable cost
Total variable cost/Quantity
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Average total cost
Average fixed cost + Average variable cost
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Long-run marginal cost
Addition to TC resulting from producing one additional unit of output when all the FOP are variable
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Long-run average cost
TC of producing a particular level of output divided by the size of output when all the FOP are variable
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Total Revenue
All the money received by a firm from selling its total output
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Average Revenue
Total Revenue/Output
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Marginal Revenue
Addition to TR resulting from the sale of one more unit of the product
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Profit
Difference between total sales revenue and total cost of production
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Normal profit
Minimum profit a firm must make to stay in business
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Abnormal profit
Profit over and above normal profit
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The role of profit in a market economy
Business incentives,Worker incentives,Shareholder incentives,Resource allocation,Economic efficiency,Rewards innovatoin
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Technological Change
Overall effect of invention,innovation and the diffusion or spread of technology in the economy
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Invention
Making something entirely new; something that did not exist before
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Innovation
Improves on or makes a significant contribution to something that has already been invented
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Mechanisation
Process of moving from a labour intensive to a more capital-intensive method of production
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Automation
Automatic control where machines operate other machines
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Creative destruction
Capitalism evolving and renewing itself over time through new technologies and innovations replacing old
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Production
Converting inputs into output
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Examples of how labour productivity can be improved
Training,Experience,Technology,Specialisation
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Specialisation
People doing only the things they're best or most efficient at
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Better quality,Higher quantity,labour productivity,EOS,Training costs reduced
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Repetitive,Boredom,Less self-sufficient,Lack of flexibility
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Functions of money
Medium of exchange,Measure of value,Store of value,Standard of deferred payment
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What do economists include in the cost of production?
Opportunity Cost
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Where does the marginal cost curve meet the average cost curve?
At the lowest point on AC
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What is marginal product?
The additional output produced by adding one more unit of a factor input
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What is average product?
The output produced per unit of factor input
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Technical EOS
Production line, Specialisation, law of increased dimensions
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Larger firms can negotiate discounts with sellers as they'll be the most important to customers of suppliers
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Managerial EOS
Large firms can employ specialist managers, better decision making
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Financial EOS
Larger firms can borrow money at a lower rate of interest
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Risk-bearing EOS
Larger firms can diversify into different product areas,more predictable overall demand,more able to take risks and absorb failures
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Marketing EOS
Cost per product of advertising several products may also be lower,Brand awareness
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What do high fixed costs create?
Large economies of Scale
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What causes the LRAC curve to shift?
External economies and diseconomies of scale
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Cost curves diagram
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AP, MP and TP diagram
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SRAC and LRAC diagram
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Returns to scale diagram
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Revenue diagram
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## Other cards in this set

### Card 2

#### Front

At least one of the FOP is fixed and cannot be varied

#### Back

What is the short run?

### Card 3

#### Front

All FOP can be varied

### Card 4

#### Front

Change in the quantity of total output resulting from the employment of one more worker

### Card 5

#### Front

SR-as a variable FOP is added to a fixed FOP, eventually MR and AR to the variable factor will begin to fall