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- Distinguish between the short run and long run in the context of production:
Short-Run: the period of time when at least one factor of production is fixed.
Long-Run: the period of time when all factors of production are variables.
- Define total product, average product and marginal product, and construct diagrams to
show their relationship:
Total product
------------------
Q of labour
Marginal Product: is the change in total output brought about by the last worker
Change in TP
-----------------------------
Change in Q of labour
- Explain the law of diminishing returns:
Law of diminishing returns: is, as more and more units of a variable input are added to one or more
fixed inputs, the marginal product of the variable input as first increases, but there comes a point
when it begins to decrease.
- Explain the meaning of economic costs as the opportunity cost of all resources employed
by the firm (including entrepreneurship):
In economics, an economic cost of production is defined as the opportunity cost of all the resources
employed by the firm. Economic cost has two main components, explicit and implicit costs.
- Distinguish between explicit costs and implicit costs as the two components of economic
costs:
Explicit Costs: this refers to the opportunity cost of factors not already owned by the firm. These
costs are simply expressed as the price that a firm must pay for an item such as raw materials or
water. Examples are rent, wages, raw materials.
Implicit Costs: when a firm already owns a factor of production, they don’t have to pay money for
their use, but an opportunity cost exists. In this instance, the opportunity cost is what firms could
have earned from hiring out the use of the factor to another firm instead of using it.
- Explain the distinction between the short run and the long run, with reference to fixed
factors and variable factors:
In the short-run, some factors of production are fixed in supply, however in the long-run there are
no factors of production that are fixed.
Short-Run:
Fixed Variable
- Marketing - Fabric
- Admin - Electric parts
- Staff wages - Packaging
- Transport
- Overheads
- Rent
TC=TFC+TVC
Average Cost: is the cost per unit to produce
ATC = TC
----
MC= change in TC
----------------
Change in Q
- Draw diagrams illustrating the relationship between marginal costs and average costs, and
explain the connection with production in the short run:
As MP increases then MC decreases, this is because as workers start to be more productive it costs
less to produce once diminishing marginal returns start MC increase as it costs more when workers
become less productive.
- Calculate total fixed costs, total variable costs, total costs, average fixed costs, average
variable costs, average total costs and marginal costs from a set of data and/or diagram:
- Distinguish between increasing returns to scale decreasing returns to scale and constant
returns to scale:
Increasing Returns to Scale: a given % increases in input leads to a greater % increase in output
Decreasing Returns to Scale: a given % increase in input leads to a lesser % increase in output
- Outline the relationship between short-run average costs and long-run average costs:
In the short-run at least one factor of production is fixed, however, in the long-run none of the
factors of production are fixed and all of them
are variable.
The reason for the LRATC curve is shaped like that is because the decreasing section of it is
economies of scale and the increasing part is the
diseconomies of scale part.
Example: Explanation:
Technical A larger firm may be able to adopt technology
of production not available to smaller firms
- e.g. assembly line
Financial A large firm can borrow money from a bank at a
lower interest rate.
Managerial A larger firm can employ specialist
- e.g. accountant
Marketing Input = bulk buying
Output= decrease in distribution cost
Risk-bearing A larger firm can diversify, decreasing the risk
of the firm.
Example: Explanation:
Coordination If parts are missing (slows down production) or
too many ordered, storage problems.
Communication: Take too long/longer to communicate between
departments.
Revenues:
Total Revenue:
TR = P * Q
AR = TR / Q
Marginal Revenue: additional revenue arising from the sale of one additional unit
MR = change in TR / change in Q
- Draw diagrams illustrating the relationship between total revenue, average revenue and
marginal revenue:
Calculate PED:
Profit:
Economic profit:
- Describe economics profit as the case where total revenue exceeds economic cost:
- Explain that economic profit is profit over and above normal profit and that the firm earns
normal profit when economic profit is zero
- Explain why a firm will continue to operate even when it earns zero economic profit:
To calculate profit = TR – TC, if the profit is above zero, then it is abnormal. If it is at zero, then it is
normal. If it is below zero it is a loss.
Goals of firms:
Profit maximization:
- Explain the goal of profit maximization where the difference between total revenue and
total costs is maximised or where marginal revenue equals marginal costs:
Profit maximization: is the point where total cost is smaller than total revenue by the biggest
margin.
- MC = MR
Revenue Curves:
- Explain, using diagram, the shape of the perfectly competitive firm’s average revenue and
marginal revenue curves, indicating that the assumptions of perfect competition imply
that each firm is a price taker:
These diagrams show that all firms are price takers, since the market is the one to set the price,
and the firms take those prices as if they decrease or increase it the effect will not be good for
them. The only way of changing these prices is in supply or demand change.
- Explain, using diagrams, that it is possible for a perfectly competitive firm to make
abnormal profit, normal profit or negative profit in the short run based on MC and MR
profit maximization rule:
This is abnormal profit in the short run as AC is lower than P
Profit maximization in the long-run:
- Explain, using a diagram, why, in the long run, a perfectly competitive firm will make
normal profit:
Firms are attracted by the abnormal profit so they join the market causing supply to increase and
therefor decreasing the price to AC making it normal profit