Micro 4 - Productivity, a firm's costs and the supply curve Flashcards

1
Q

What does production do?

A

> Production converts inputs, or services of factors of production such as capital and labour, into the final output.

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2
Q

Division of labour - definition

A

> Where production is broken down into many separate tasks.

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3
Q

Division of labour - advantages

A
  1. Division of labour raises output per person as people become more efficient through constant repetition of a task.
  2. This gain in productivity helps to lower cost per unit and ought to lead to lower prices for consumers.
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4
Q

Division of labour - disadvantages

A
  1. Unrewarding, repetitive work lowers motivation and productivity, which can lead to a decrease in pride of work and therefore, lower quality.
  2. Dissatisfied workers are less punctual and there are higher rates of absenteeism.
  3. May choose to move to a less boring job which leads to higher worker turnover.
  4. Little training so can’t find another job = structural unemployment.
  5. Mass-produced, standardised goods lack variety for customers.
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5
Q

What distinction is essential to economics?

A

> The distinction between short and long run analysis.

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6
Q

Long run - definition

A

> A time period in which all the factors of production are variable, so a firm can expand its’ capacity.

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7
Q

Short run - definition

A

> A time period in which at least one of the factors of production is fixed.
Traditional model for short-run = fixed capital, flexible labour.

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8
Q

Adam Smith: Specialisation and division of labour.

>Why does productivity increase?

A
  1. An increase of dexterity in every particular worker.
  2. A saving of the time which is commonly lost in passing from one species of work to another.
  3. The invention of a great number of machines to facilitate and abridge labour.
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9
Q

Why would employers employ more labourers?

A

> If one more worker increases output by less than average, productivity falls.
Only employ if extra output cover the wage.

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10
Q

When does marginal product cross productivity?

A

> Marginal product cross productivity at productivity’s highest point.

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11
Q

Increasing marginal returns - definition

A

> The phenomenon whereby increasing one variable input (usually labour) leads to increasing marginal product (and productivity) of that input.
E.g. as more staff are employed, each new member of staff leads to an increase in productivity.

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12
Q

Diminishing marginal returns - definition

A

> The phenomenon whereby additional staff employed lead to a decline in marginal product of labour and a decline in the marginal product and productivity of input.
E.g. as new members of staff are employed, each new member causes a fall in productivity.

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13
Q

Productively efficient - definition

A

> Where the quantity produced per unit is maximised for a firm.
Or where factor inputs required for each unit produced are minimised.

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14
Q

Returns to scale - definition

A

> Considers how an increase in a number of factors of production will affect output in the long run.
E.g. a 10% increase in both labour and capital inputs may yield a 15% increase in output showing increasing returns to scale.

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15
Q

Firms - when should they produce more?

A

> When a firm considers whether to produce a good and how many units to produce, they need to know how much it will cost per unit to produce the good in different quantities in addition to how many units they are likely to be able to sell at a range of prices.

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16
Q

Total cost (TC) - definition

A

> The total cost of production at any level of output.

>TC = VC + FC.

17
Q

Fixed costs (FC) - definition

A

> Costs that don’t vary as output increases (so direct increase in revenue).
This includes payments on rent, insurance, legal costs and, in short run, interest payments on capital.

18
Q

Variable costs (VC) - definition

A

> Costs which do vary directly with increases in output.

>Depending upon which factors are variable, this may include the cost of raw materials and wages paid to labour.

19
Q

Semi-fixed costs - definition

A

> Costs which may vary with output but not directly.

>E.g. energy.

20
Q

Average costs (AC) - definition

A

> The cost per unit produced.
How much the firm has to pay in factor costs for each unit produced at different levels of output.
Formula: AC = TC/Q where Q is the total output of the firm.

21
Q

Marginal costs (MC) - definition

A

> The additional cost incurred when output is increased by an additional unit.
The formula is: MC = TCn units - TCn-1.

22
Q

Average variable cost

A

> AVC = TVC/Q.

23
Q

Average fixed cost

A

> AFC = TFC/Q.

24
Q

Why do prices change when output increases?

A
  1. More workers = scarcer = rise in price.
  2. Diminishing returns = more workers to produce more.
  3. Bulk buy.
25
Q

What is the supply curve used to express?

A

> The supply curve is used to express the supply of a good or service within an industry.

26
Q

Supply - definition

A

> Supply is defined as the total quantity of a good or service that producers are willing to provide at a range of prices over a given period of time.

27
Q

Why does the supply curve slope upwards from left to right? detail

A

> The marginal cost of production for firms in an industry is the most significant factor that explains this.
Economists usually consider the MC curve for a firm which aims to profit maximise to actually be the supply curve for that firm.
So when we combine all of the firms in an industry, then they will present the supply curve for that indusctry.

28
Q

3 reasons for the supply curve’s slope

A
  1. Scarcity.
  2. Law of diminishing returns.
  3. Marginal cost of production.
29
Q

Change in supply.

A

> A change in supply refers to a change in the quantity of a good or service producers are willing and able to provide at a range of prices over a given period of time.
This is illustrated by a shift in supply curve.
A change in the quantity supplied is a change in the amount of goods actually supplied by producers. Perhaps the consequence of a change in the price level.
However, a change in price doesn’t directly affect the supply of a good and can’t directly cause a shift in supply.
This is because the supply curve already illustrates what happens as prices rise and fall; that is the purpose of the curve.

30
Q

Change in supply - price level.

A

> a change in price doesn’t directly affect the supply of a good and can’t directly cause a shift in supply.
However, in long run analysis it may be that an increase in price level encourages firms to invest in new capital or train more staff so that supply of the good becomes cheaper at any given level of output.
But this is not a direct consequence of the price increase but rather thanks to an increase in quantity or quality of factors available.

31
Q

Acronym for reasons for shift in the supply curve.

A

PINTSWC.

32
Q

Reasons for shift in supply curves

A
  1. Productivity. Up = right.
  2. Indirect tax. Up = left.
  3. No. of firms. Up = right.
  4. Technology. Up = right.
  5. Subsidies. Up = right.
  6. Weather. Up = right.
  7. Cost of production. Up = left.
33
Q

Q. Increase in minimum wage: affect on the firm’s supply of “jeans” if its workers earn the min. wage.

A
  1. Define supply. Curve shifts left as pay more despite same output. Fewer made to make the same profit.
  2. Increase in cost of production = less profit = curve shifts inwards. Diagram.
  3. AC and MC. Define MC, calculated by change in costs divided by change in quantity. If all other costs are fixed, increase in wages divided by same change in quantity will increase. MC will get greater and greater as not only will diminishing returns mean returns from additional labour will be lower, but also… ‘Xp’ more per hour of work.
  4. Additional labour costs will also cause the AC to increase. Diagram of MC and AC shifts.
  5. Producing more output = less productively efficient so have to produce smaller output.