Micro 2

• Derived Demand


  demand as a consequence of demand for another good e.g. demand for houses and kitchen appliances
• Joint Supply


  an increase in the supply of a good results in the increased supply of another related good e.g. increase supply of cows for milk will lead to an increased beef supply
• Signalling Function of Price


  rising price gives a signal to producers that they should increase their quantity supplied and signals to consumers that they should decrease the quantity demanded, and vice versa
• Incentive Function of Price


  prices give producers the incentive either to increase or decrease the quantity they supply, a rising price gives producers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues
• Rationing Function of Price


  changes in prices distribute scarce goods to those consumers who value them most highly
• Productivity


  output per unit of input
• Output Efficiency


  producing more output than another company with the same inputs
• Labour Productivity


  the output produced in a certain amount of time for a given input of labour cost
• Labour Productivity Formula


  Output per period / number of employees per period
• Division of Labour


  dividing the workforce into groups and allocating specific individuals to specific tasks
• Economies of Scale


  when long-run average total cost falls as the quantity of output increases
• Specialization


  when firms / individuals focus their resources on production of goods for which they have comparative advantage
• Advantages of Specialization (2)


  - achieves economies of scale

  - reduced cost of training
• Disadvantages of Specialization (2)


  - increased monotony of work

  - specialized firms lack flexibility to market changes
• Marginal Returns


  the additional output resulting from an extra unit of input
• Total Returns


  the total return created by all inputs
• Average Returns


  total return / number of inputs
• LRAC 'Envelope Curve'


  each SRAC curve is u-shaped due to diminishing marginal returns, the MES of each of each SRAC is joined to make the LRAC curve

  
• Constant Returns to Scale

  every extra unit of input added leads to a proportionate increase in output e.g. 10% increase in inputs results in 10% increase in output e.g. Whatsapp

  
• Increasing Returns to Scale

  every additional unit of input results in a more proportionate increase in output e.g. Amazon

  
• Decreasing Returns to Scale


  every additional unit of input results in a proportionally lower increase of output e.g Tesla

  
• Long Run Average Cost

  Cost per unit of output incurred when all factors of production or inputs can be varied
• Total Costs Formula


  fixed costs + variable costs
• Minimum Efficient Scale


  the level of output at which all economies of scale are exhausted, depicted by MC = AC
• Marginal Cost Formula


  change in total cost / change in quantity
• Average Cost


  cost per produced unit
• Average Cost Formula


  total cost / total output
• Fixed Costs


  costs that do not vary with the level of production e.g. machinery
• Variable Costs


  costs that vary directly with the level of production e.g. materials
• The marginal cost curve is U-shaped because...


  initially as output increases, marginal costs fall, but diminishing returns take effect at a certain output, resulting in marginal costs rising
• The average cost curve is U-shaped because...


  when average costs exceed marginal costs, average cost is falling as fixed costs stay the same over an increasing level of output; however, when marginal costs exceed average costs, average costs are rising
• Factor Prices


  the amount paid for one unit of a factor of production
• External Economies of Scale


  when long run average costs decrease as a result of factors outside the business' control
• Internal Economies of Scale


  when long run average costs decrease as a result of the business operating more efficiently
• Financial Economies of Scale

  when long-run average costs decrease due to banks lending at cheaper rates for larger businesses
• Technical Economies of Scale

  when long-run average costs decrease due to the use of specialist machinery in the production process
• Risk-bearing Economies of Scale


  when long-run average costs decrease by spreading the cost of product failure over a wider product portfolio
• Purchasing Economies of Scale

  when long-run average costs decrease due bulk-buying discounts
• Managerial Economies of Scale


  reductions in long-run average cost as a result of being able to employ specialist managers who are more productive
• Marketing Economies of Scale

  reductions in long-run average cost as a result of being able to divide up marketing costs between more units of output