UNIT 1: PRODUCTION AND ITS COSTS
Production is any economic activity that satisfies human wants.
The short run is the period over which at least one factor of production is
fixed.
The long run is the period when all factor inputs are variable.
Economies of scale are the advantages of a firm increasing its scale or
capacity which lead to falling long-run average costs.
Diseconomies of scale are the disadvantages of a firm increasing its scale
or capacity which lead to increasing long-run average costs.
External economies of scale are the benefits that arise from general
growth in the economy or a specific industry.
External diseconomies of scale are extra costs or disadvantages from
outside economic forces.
The law of diminishing marginal returns to a variable factor states
that as more and more of a variable factor is added to a fixed amount of
another factor, the marginal product will eventually diminish. Therefore, as a
variable factor of production is added to fixed factors of production, the total
product will increase, first at an increasing rate then at a decreasing rate
until eventually, total product falls. Illustration: Fishing example.
Fixed costs of production are the costs of production that do not vary as
the level of output changes. E.g. rent, leasing of equipment, business rates,
salaried staff, interest rates, depreciation of capital equipment and insurance.
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Production is any economic activity that satisfies human wants.
The short run is the period over which at least one factor of production is
fixed.
The long run is the period when all factor inputs are variable.
Economies of scale are the advantages of a firm increasing its scale or
capacity which lead to falling long-run average costs.
Diseconomies of scale are the disadvantages of a firm increasing its scale
or capacity which lead to increasing long-run average costs.
External economies of scale are the benefits that arise from general
growth in the economy or a specific industry.
External diseconomies of scale are extra costs or disadvantages from
outside economic forces.
The law of diminishing marginal returns to a variable factor states
that as more and more of a variable factor is added to a fixed amount of
another factor, the marginal product will eventually diminish. Therefore, as a
variable factor of production is added to fixed factors of production, the total
product will increase, first at an increasing rate then at a decreasing rate
until eventually, total product falls. Illustration: Fishing example.
Fixed costs of production are the costs of production that do not vary as
the level of output changes. E.g. rent, leasing of equipment, business rates,
salaried staff, interest rates, depreciation of capital equipment and insurance.
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