3.3.1, 3.3.2, 3.3.3, 3.3.4

Question 1

define short run

Answer 1

the short run is the time period when at least one factor of production is fixed

Question 2

define long run

Answer 2

the time period when all factors of production become variable

Question 3

define total product

Answer 3

the total output of a firm at a particular level of resource employment

Question 4

define average product

Answer 4

the output per unit of variable input

Question 5

how do u calculate average product

Answer 5

labour

Question 6

define marginal product

Answer 6

the additional output from one extra unit of input

Question 7

how do you calculate marginal product

Answer 7

change in variable input

Question 8

draw an average and marginal product curve

Answer 8

y axis is output per unit of input
x axis is input
average product - line going up slightly and then decreasing
marginal product - line going up steeper then decreasing steeper, goes negative

Question 9

what is the law of diminishing returns

Answer 9

as you add more of a variable factor of production to a fixed factor of production, at first the marginal product increases but eventually starts to fall. diminishing marginal returns is said to take place when marginal product starts to fall.

Question 10

explain the shape of the marginal product curve with reference to the law of diminishing returns

Answer 10

marginal product rises at first, but then falls as consecutive units of a variable factor add less to total product. as the MP falls this brings down the average product. diminishing marginal returns takes place when the MP falls, and the diminishing average returns takes place when the AP falls

Question 11

label on the curves diminishing returns and diminishing average returns

Answer 11

DR is the peak of the MP curve

DAR is the peak of the AP curve

Question 12

define constant returns to scale

Answer 12

where the amount of resources doubles, output also doubles

Question 13

define increasing returns to scale

Answer 13

when the amount of resources doubles, the output more than doubles

Question 14

define decreasing returns to scale

Answer 14

when the amount of resources doubles, output less than doubles

Question 15

how do productivity and factor prices affect firms’ costs of production and the choice of factor inputs?

Answer 15

as productivity increases then a firms average cost of production falls as each factor input is contributing more to total output. investing in capital increase the productivity of labour, depending on the ratio of capital to labour employed. factor prices such as wages, or capital prices affect the cost of production - the higher the factor prices, the higher the costs of production. if one factor price rises in relation to another it might change the choice of factor inputs away from this factor e.g if wages rise, then firms may prefer to employ more capital and less labour.

Question 16

define fixed costs

Answer 16

costs that do not change with output such as rent

Question 17

define variable costs

Answer 17

costs that do change with output such as wages

Question 18

draw a diagram showing the general shape of a total cost, total fixed cost and total variable cost curve

Answer 18

check notes

Question 19

write a formula showing how you could calculate total costs

Answer 19

total costs = total fixed costs + total variable costs

Question 20

calculate average total cost

Answer 20

ATC = total cost / quantity

Question 21

calculate marginal costs

Answer 21

change in total costs / change in output

Question 22

draw a diagram showing the general shape of an average total cost and marginal cost curve

Answer 22

see notes

Question 23

draw a diagram showing marginal and average product and underneath a diagram showing marginal and average cost

Answer 23

see notes

Question 24

how does the law of diminishing marginal returns affect the shape of the marginal and average costs curves

Answer 24

when diminishing returns sets in, MC starts to rise, and when AP starts to fall, ATC starts to rise. these curves are a mirror image of one another.

Question 25

draw a long run average total cost curve

Answer 25

Costs y axis
q of output x axis
U shaped curve with flat bit in middle
label EOS, DEOS and constant returns to scale (Middle)

Question 26

define economies of scale

Answer 26

economies of scale are when the long run average total cost falls as output increases

Question 27

what is meant by internal economies of scale

Answer 27

when long run average total costs fall as the output of the firm increases

Question 28

what is meant by external economies of scale

Answer 28

when long run average total costs fall as output of the industry increases

Question 29

what is meant by the minimum efficient scale

Answer 29

the lowest output at which long run average costs are minimised

Question 30

what are the implications of the minimum efficient scale for the size of a business

Answer 30

if the MES is achieved at a high level of output, this suggests that the industry might prefer larger firms. if the MES is achieved at low levels of output, then there is less scope for economies of scale so this industry favours smaller firms

Question 31

what are the implications of the MES for the size of barriers to entry

Answer 31

if the MES is achieved at high levels of output, then there is scope for large economies of scale, so barriers to entry will be high as new firms would have to enter the market at a high level of output in order to compelte on price with the incumbent firms

Question 32

name and briefly describe 6 different types of internal economies of scale

Answer 32

• Purchasing/commercial/bulk buying EOS - lower cost per unit to purchase raw materials when buying in bulk
• technical EOS - the fixed cost of machinery can be spread over a larger output when producing on a larger scale
• managerial EOS - when specialist managers can be more efficient than workers with more general skills. They can only be possible when producing large volumes.
• Marketing EOS - when the fixed costs of marketing can be spread over a larger output, and where bulk buying can take place on marketing space such as billboards
• Financial EOS - when larger firms are lower risk to lend to, and hence attract a lower interest rate on loans
• risk bearing EOS - when the cost of one part of the business falling can be spread over a larger output.

Question 33

what economies of scale might exist in the car industry

Answer 33

manufacturing uses machinery - technical EOS
Raw materials uses bulk buying
Labour - managerial EOS

Question 34

briefly describe 3 diseconomies of scale

Answer 34

• communication issues arise as a firm gets too large meaning messages can become distorted as they pass through layers of management and different languages
• co-ordination issues arise as a firm gets too large meaning the logistics of getting the right components in the right places at the right time start to become complicated and more difficult especially if a firm is a MNC
• motivation issues arise if a firm gets too large meaning that individuals feel they are only a small part of the large organisation and so are demotivated to work to their fullest potential.

Question 35

briefly describe 3 economies of scale

Answer 35

• EO infrastructure means that the larger the industry the more cost effective it is to build things like airports or railways and so it lowers the AC of produxction for firms in this industry
• research and education infrastructure means that the larger the industry the more courses that will be set up to train workers for that industry, making workers more productive. this will lower the AC of production due to higher productivity.
• bigger industries means more available staff with expertise which means higher productivity which lowers AC of production

Question 36

what general shape would a total revenue curve be

Answer 36

Upward sloping curve (supply curve)

Question 37

what shape would an average and marginal revenue curve be?

Answer 37

straight horizontal line

Question 38

define total revenue

Answer 38

total receipts from selling goods and services

Question 39

define average revenue

Answer 39

revenue per unit of output

Question 40

formula for average revenue

Answer 40

total revenue / quantity

Question 41

define marginal revenue

Answer 41

change in output

Question 42

explain why the average revenue and marginal revenue curves are this shape under perfect competition

Answer 42

firms in perfect competition are price takes meaning the price is set by the market, and one individual firm is too small to affect the price. so the firms do not need to reduce price in order to sell more and so average and marginal revenue are constant as each extra unit is sold at the same price

Question 43

how does revenue affect decision-making by firms

Answer 43

revenue is part of profit, so as firms are profit maximisers revenue will affect profit.

Question 44

what shape is a total revenue curve

Answer 44

a negative x^2 parabola

Question 45

what shape would an average and marginal revenue curve be

Answer 45

AR - shallower demand curve

MR - steeper demand curve

Question 46

explain why the MR and AR curves are this shape

Answer 46

because firms are price makers, so to sell more of their product they have to reduce the price

Question 47

define normal profit

Answer 47

the amount of profit needed to keep the factors of production in their current use

Question 48

define supernormal profit (formula too)

Answer 48

it is the profit over and above normal profit.

Supernormal profit = total revenue - total costs

Question 49

what is the profit maximising condition

Answer 49

Marginal cost = marginal revenue

Question 50

what is meant by an economic loss

Answer 50

where total costs are higher than total revenue

Question 51

what is the short run shut down position

Answer 51

where a firm is not able to cover their total variable cost with their revenue

Question 52

what is the long run shut down position

Answer 52

a firm will shut down if they are not able to cover all their costs in the long run

Question 53

explain the role of profit in an economy

Answer 53

it acts as an incentive for risk taking amongst firms, and as a signal for firms to enter or leave a market