1.5 PRODUCTION AND COSTS

Question 1

PRIMARY AIM OF FIRMS

Answer 1

profit maximisation

Question 2

TC

Answer 2

FC + VC

Question 3

ATC x2

Answer 3

TC / Q

AFC + AVC

Question 4

AFC

Answer 4

FC/Q

Question 5

AVC

Answer 5

VC/Q

Question 6

MC x2

Answer 6

change in TC/
change in Q

the slop of TC

Question 7

SHORT RUN PRODUCTION

Answer 7

period of time during which
the number of firms in an industry

and the amount of land and capital

employed by existing firms are fixed in quantity

only variable costs like labour can vary

Question 8

LONG RUN PRODUCTION

Answer 8

period of time during which

amount of land and capital

used in production by existing firms are variable

> D= increase capital from firms and new firms enter

Question 9

LAW OF DIMINISHING RETURN

Answer 9

shows as more and more of a variable resource- labour

is added to a fixed resource-capital

beyond a certain point the productivity of additional units of the variable resources declines

because the amount of capital is fixed

more workers find it harder to continually add to the firm’s output

Question 10

LAW OF DIMINISHING RETURNS EXPLAINS…

Answer 10

the shape of a firms SR productivity cruves

Question 11

LAW OF DIMINISHING AND MARGINAL PRODUCT

Answer 11

as successive units of the variable factor are added

the marginal output will at first increase then decrease

Question 12

MC

Answer 12

the cost of producing one extra unit of output

Question 13

EXPLICIT COSTS

Answer 13

monetary payments (wages) to factors of production not already owned by a firm

Question 14

IMPLICIT COSTS

Answer 14

“normal profit”

opportunity cost faced by a business owner

who chooses to use his skills and resources

to operate his own enterprise

rather than seeking employment by someone else

Question 15

COST IN THE LONG RUN OVERVIEW

Answer 15

in the long run all FoPs are variable

a firm can change its size/scale

3 things can happen:

increasing returns

constant returns

decreasing returns

Question 16

INCREASING RETURNS

Answer 16

an increase in inputs leads to a larger proportional increase in output

Question 17

CONSTANT RETURNS

Answer 17

when an increase in inputs leads to a proportionally identical increase in output

Question 18

DECREASING RETURNS

Answer 18

when an increase in inputs leads to a proportionally smaller increase in the quantity of output

“too big for its own good”

Question 19

ECONOMIC COSTS

Answer 19

opportunity costs of all resources employed by the firm

Question 20

ECONOMIES OF SCALE CATEGORIES x6

Answer 20

risk bearing

financial

marketing

technical

managerial

purchasing

Question 21

DISECONOMIES OF SCALE x3

CCCM

Answer 21

Communication

Co-ordination

Control

Motivation

Question 22

ECONOMIES OF SCALE CATEGORIES

Answer 22

really fun mums try making pies

internal- only firm benefits

external- whole industry benefits
e.g airport attracts lots of business as businesses cluster they are more powerful

Question 23

MES

Answer 23

minimum efficient scale

minimum level of output for EOS to be fully exploited

Question 24

LAW OF DIMINISHING RETURNS CAN EXPLAIN

Answer 24

MC and MP as they are mirrors of each other

AP and ATC as they are mirrors of each other

TVC

Question 25

LAW OF DIMINISHING RETURNS OVERVIEW

Answer 25

``` productivity gains specialization unused capital increase productivity as output increase quicker than costs ``` diminishing returns fixed capital= constraint decrease productivity costs increase to increase output

Question 26

TR

Answer 26

PxQ

Question 27

AR

Answer 27

TR/Q

Question 28

MR

Answer 28

change in TR/ | change in Q

Question 29

EVALUATION OF EOS/DISEOS

Answer 29

depends on initial level of output if firm is to the left of MES then if it increases output it will not experienced disEOS depends on the initial fixed costs of the firm if the firm has massive fixed costs then it will take a greater time/ quantity for MES to be reached MES can be prolonged over a period of time

Question 30

OBJECTIVES OF FIRMS

Answer 30

1. profit maximise 2. satisficing - -> SURVIVAL 3. revenue maximise 4. sales maximise

Question 31

PROFIT MAXIMISE

Answer 31

MR = MC | LR

Question 32

SATISFICING

Answer 32

sacrifice + satisfying SR different stakeholders have different objectives = conflict

Question 33

REVENUE MAXIMISE

Answer 33

MR = O drive out competition with predatory prices increase size lead to EOS- barrier to entry

Question 34

SALES MAXIMISE

Answer 34

AR=AC break even increase size lead to EOS- barrier to entry

Question 35

BARRIERS TO ENTRY | MAIN 3 CATEGORIES

Answer 35

legal- patents/ reg/ H&S structural- high start up costs strategic- anti competitive prices

Question 36

BARRIERS TO ENTRY

Answer 36

EOS legal v. high start up costs anti competitive prices branding/advertising sunk costs

Question 37

BARRIERS TO EXIT

Answer 37

resale of asset redundancy costs cost for ending license agreement: rent = barriers to entry

Question 38

PRODUCTIVE EFFICIENCY

Answer 38

P= ATC maximising output at the lowest possible cost full exploitation of EOS

Question 39

ALLOCATIVE EFFICIENCY

Answer 39

D=S P=MC AR=MC

Question 40

DYNAMIC EFFICIENCY

Answer 40

re-invest supernormal profits in the LR into R + D and new technology to lower LRAC

Question 41

X EFFICIENCY

Answer 41

no waste all production on AC/ATC curve

Question 42

ALLOCATIVE EFFICIENCY | CONSUMER ANALYSIS

Answer 42

resources follow consumer's demand low P max of consumer surplus high choice high quality

Question 43

ALLOCATIVE EFFICIENCY | PRODUCER ANALYSIS

Answer 43

retain or increase market share stay ahead of rivals increase profit

Question 44

PRODUCTIVE EFFICIENCY | CONSUMER ANALYSIS

Answer 44

lower price high C surplus full exploitation of EOS MC=ATC

Question 45

PRODUCTIVE EFFICIENCY | PRODUCER ANALYSIS

Answer 45

move production at lower ATC higher profit lower prices = greater market share

Question 46

DYNAMIC EFFICIENCY | CONSUMER ANALYSIS

Answer 46

new innovative products lower P over time high consumer products iphone/ internet creative destruction

Question 47

DYNAMIC EFFICIENCY | PRODUCER ANALYSIS

Answer 47

LR profit max lowest cost over time retain/ increase market share stay ahead of rivals

Question 48

X EFFICIENCY | CONSUMER ANALYSIS

Answer 48

lower price higher consumer surplus

Question 49

X EFFICIENCY | PRODUCER ANALYSIS

Answer 49

lower costs higher profits lower price= increase market shares

Question 50

TECHNOLOGICAL CHANGE CAN LEAD TO

Answer 50

more capital or labour intense production 1. productive E 2. allocative E - -> depends if consumers benefit 3. dynamic E shift LRAC down and shift MES to the right on the lower LRAC curve

Question 51

TECHNOLOGICAL CHANGE AND MARKET STRUCTURES

Answer 51

n of firms can both increase and decrease depending product homogeneity: products are more differentiated knowledge: increased for both consumers and producers barriers to entry: increase EOS but decrease physical costs