1 - The Theory Of Production

Question 1

How many fixed factors are there in the short run?

Answer 1

At least one, eg the size of the premises

Question 2

What is marginal product and how does it increase output if it is increasing or decreasing?

Answer 2

MP is the increase in output added by an additional nit of labour. If it is increasing then the variable factor will increase output more than proportionately. And vice versa if it is decreasing.

Question 3

Related to MP, when will AP start to fall? And why?

Answer 3

When MP falls below AP. Because there are too many variable factors for the fixed factor.

Question 4

In the short run, how can firms increase output?

Answer 4

By combining more or less of the variable factors with the fixed factor.

Question 5

What is the process of increasing output in the SR? And the name of this.

Answer 5

1) Increasing returns to a variable factor
(output rises more than proportionately to the variable input)
2) Diminishing MR’s can set in
(Output increases less than proportionately with the variable factor)
Name: LAW OF DIMINISHING RETURNS.

Question 6

Where is optimal output and productive efficiency, and why?

Answer 6

Lowest point on the ATC curve.

Because the firm is minimising average total costs.

Question 7

Formula for revenue?

Answer 7

output x price

Question 8

What are fixed costs?

Answer 8

Costs that:
-Do not vary with output
-Have to be paid even if output = 0
eg RENT/SALARIES

Question 9

What are variable costs?

Answer 9

Costs that vary with output directly

If firms prod is 0 - costs = 0

Question 10

Semi-Variable Costs?

Answer 10

Costs that have a fixed and a variable factor.

eg - electricity bill.

Question 11

Average Fixed Costs Formula

Answer 11

TFC / no. produced

Question 12

AVC Formula

Answer 12

TVC / NO. PRODUCED

Question 13

ATC Formula

Answer 13

TC / NO. PRODUCED

Question 14

MC Formula

Answer 14

Cost of an extra unit of output

Question 15

What is the relationship between MC and AC

Answer 15

If MC is below AC - AC falls
If MC is above AC - AC rises
MC cuts AC at lowest point.

Question 16

How can firms avoid diminishing returns in the long run? But why does it return

Answer 16

By varying their fixed factor and using specialisation.

It returns when the firm increasing output beyond optimum output, and when the fixed factors become overloaded.

Question 17

What do you know about fixed factors in the long run?

Answer 17

There are none.

Question 18

What is the LRAC constructed from? And why?

Answer 18

The Op Outputs on the SRAC curves. DUe to economies of scale where factor inputs will result in a more than proportional increase in output.

Question 19

What happens if a firm has increasing returns to scale?

Answer 19

ECONOMIES OF SCALE

Question 20

What happens if a firm has decreasing returns to scale?

Answer 20

DISECONOMIES OF SCALE

Question 21

What happens when a firm is inbetween increasing and decreasing returns to scale?

Answer 21

CONSTANT RETURNS TO SCALE

- No more econs of scale can occur.

Question 22

What is the minimum efficient scale? And where is it?

What else do you know about it?

Answer 22

This is when a firm has exploited all of its economies of scale.
It is the lowest point on the LRAC curve.
It is unlikely to be one single point of the LRAC, more likely to be a range of points.
If a firm cant reach MES - unlikely to be competitive with other firms due to higher costs.

Question 23

What is the relationship between SR and LR production?

Answer 23

1) A sudden increase in output overworks the fixed factor and the firm leaves the optimal output position/combo
2) As firm increases output it brings fixed factors back into use and moves down SRATC2 to productive efficiency and its optimal output.