Chapter 1 - The theory of production

Production in the short run
1. Law of Diminishing (marginal) returns OR Law of variable proportions
2. Decreasing marginal returns
3. Increasing marginal returns
4. Productive efficiency - producing at min. point of AC curve
5. Marginal cost - cost of extra unit of output, cuts AC at min. point, U shaped
6. Marginal product + total product - n shaped curve
7. AFC curve keeps falling as output increases while fixed costs are fixed
Short run - When at least one of the factor of productions if fixed
1. Long run - When all factors of production are variable
Fixed costs - do not vary with output
Variable costs - vary with output
Production in the long run
1. LRAC curve comprised of several SRAC curves - min points form LRAC
2. Different shapes - trapezium, u , continuously falling
3. Decreasing returns to scale - increase in inputs leads to less than proportionate increase in output
4. Increasing returns to scale - Increase in inputs leads to more than proportionate increase in output
5. Constant returns to scale - Increase in inputs leads to proportionate increase in output
6. Minimum efficient scale - lowest point of output at which costs are minimised
Economies of scale
1. internal economies of scale
  1. Technical
    1. specialist machinery
    2. specialisation of labour
    3. increased dimensions
  2. Financial
    1. larger firms can get lower interest on loans
  3. Marketing
    1. bulk buying
  4. Managerial
    1. division of labour
  5. risk bearing
    1. multiplicity of brands
2. External, economies of scale outside a firm but inside an industry e.g.the automobile lowered costs of rail transporters.
3. Diseconomies of scale
  1. Morale
  2. Control
  3. Co-operation
  4. Co-ordination
After MR curve hits axis AR curve is inelastic

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Chapter 1 - The theory of production

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