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Production
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- the process of transforming a set of resources into a good or service that has economic value
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Inputs
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the resources used in production
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Outputs
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the quantity of a good or service that results from production
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Primary Sector
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- industries that extract or cultivate natural resources such as mining, forestry, fishing, and agriculture
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Secondary Sector
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- industries that fabricate or process goods and includes manufacturing and construction
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Service Sector
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- includes trade and information industries such as baking and insurance
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Labour Intensive Process
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- a production process that employs more labour and less capital
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Capital Intensive Process
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- a production process that employs more capital and less labour
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Productive Efficiency
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- making a given quantity of output at the lowest cost
- the lowest cost process
- the lowest cost process
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Explicit Costs
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- payments made by a business to a business or people outside of it
- also referred to as accounting costs
- all costs that appear in the business's accounting records
- also referred to as accounting costs
- all costs that appear in the business's accounting records
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Implicit Costs
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- the owner's opportunity cost of being involved in the business
- what the owner gives up by being involved in the business
- what the owner gives up by being involved in the business
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Total Revenue - Explicit Costs
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Accounting Profit Formula
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Total Revenue - Explicit Costs - Implicit Costs
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Economic Profit Formula
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Fixed inputs
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- inputs whose quantities cannot be varied in the short run (such as capital)
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Variable Inputs
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- inputs whose quantities can be adjusted in the short run (such as labour)
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Total product
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- the overall quantity of output associated with a given workforce
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Average Product
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- the quantity of output produced per worker
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Total Product / Number of workers
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Average product formula
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Marginal Product
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the extra output produced by an additional worker
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Change in Total Product (q) / change in total workers
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Marginal Product Formula
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The Law of Diminishing Marginal Returns
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- how short run production is determined
- at some points, as more units of a variable input are added to a fixed input, the marginal product will start to decrease because the new variables are being added to an increasingly scarce fixed input
- at some points, as more units of a variable input are added to a fixed input, the marginal product will start to decrease because the new variables are being added to an increasingly scarce fixed input
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- the marginal value must be above the average value
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What happens to the marginal value if the average value is rising?
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The marginal value must be below the average value
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What happens to the marginal value if the average value is falling?
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- the marginal value must equal the average value
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What happens to the marginal value if the average values stays constant?
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Fixed costs
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- economic costs for inputs that remain fixed at all quantities of output in the short run
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Variable Costs
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- economic costs for inputs that vary at each quantity of output in the short run
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Total Costs
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- the sum of all fixed and variable costs at each quantity of output
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Marginal Cost
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- the extra cost of producing an additional unit of output
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Change in total cost / change in total product (q)
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Formula For Marginal Cost
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Marginal Cost Curve
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- this curve is shaped like a J because of the law of diminishing marginal returns
- each point on the marginal cost curve is plotted halfway between the two relevant horizontal coordinates
- each point on the marginal cost curve is plotted halfway between the two relevant horizontal coordinates
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True
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- as long as the marginal product keeps increasing, the marginal cost connected with each new worker falls for each extra unit of output
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Average Fixed Costs
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- the fixed cost per unit of output
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Fixed Costs/Total Product (q)
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Average Fixed Cost formula
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Per Unit Costs
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- expressed in terms of a single level of output
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Average Variable Costs
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- the variable cost per unit of output
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Variable Costs/Total Product (q)
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Average Variable Cost formula
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Average Fixed Costs Curve
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- negative (downward) slope
- becomes flatter as the output rises
- becomes flatter as the output rises
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Average Variable Cost Curve
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- saucer shaped which reflects its connection with the associated marginal cost curve
- when marginal cost is below AVC, the AVC declines and vice versa
- when marginal cost is below AVC, the AVC declines and vice versa
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Average Cost
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the sum of AFC and AVC at each quantity of output
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Total Cost/Total Product or AFC + AVC
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formula for average cost
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Increasing Returns to Scale
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- occurs when a business expands all inputs for a certain product by a given percentage and the output rises by an even higher percentage
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Increasing returns to scale are caused by...
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- Division of labour (workers being more efficient)
- Specialized capital (specialized machinery)
- Specialized management ( experts)
- Specialized capital (specialized machinery)
- Specialized management ( experts)
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Constant Returns to Scale
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- the percentage increase in all inputs results in the same percentage increase in output
- occur when making more items requires repeating exactly the same tasks used to produce pervious units of outputs
- occur when making more items requires repeating exactly the same tasks used to produce pervious units of outputs
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Decreasing Returns to Scale
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- the percentage increase in all inputs causes a smaller percentage increase in output
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Causes of decreasing returns to scale
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- management difficulties
- limited natural resources
- limited natural resources
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Long Run Average Cost
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- the minimum short run average cost at each possible level of output
- the curve is saucer shaped because of an initial range of increasing returns to scale, a middle range of constant returns to scale, and a final range of decreasing returns to scale
- the curve is saucer shaped because of an initial range of increasing returns to scale, a middle range of constant returns to scale, and a final range of decreasing returns to scale
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