3.Production, Costs and Revenue

Question 1

Define short-run production.

Answer 1

Occurs when a firm adds variable factors of production to fixed factors of production.

Question 2

Define long-run production.

Answer 2

Occurs when a firm changes the scale of all the factors of production.

Question 3

Define specialisation.

Answer 3

When a worker only performs one task or a narrow range of tasks instead of many.

Question 4

Define division of labour.

Answer 4

When different workers perform different tasks in order to produce a good.

Question 5

3 Advantages of division of labour.

Answer 5

• workers become more practisied at the task.
• workers are able to be more skilled at a particular task.
• it makes the production process more efficient.

Question 6

3 Disadvantages of division of labour.

Answer 6

• continually repeating the same task can be boring.
• if one task fails then good cannot be produced.
• workers only receive narrow training so are not widely skilled.

Question 7

Why is money much more efficient that bartering in regards to trade?

Answer 7

Because it doesn’t require a double coincidence of wants.

Question 8

Define 3 production functions. (types of output).

Answer 8

• total product (total output)
• average product (output per-worker)
• marginal product (change in output if one more worker is used).

Question 9

Define fixed costs.

Answer 9

The cost of fixed factors of production, which in the short-run doesn’t change with output, e.g. cost of land.

Question 10

Define variable costs.

Answer 10

The cost of production, which in the short-run can change as output changes, e.g. wages.

Question 11

In the long-run are costs fixed or variable?

Answer 11

All costs are variable as all factors of production can be changed.

Question 12

Define total costs.

Answer 12

The total cost of producing a good. (fixed costs plus variable costs), ATC=AFC+AVC.

Question 13

Define average costs.

Answer 13

The total cost of production divided by output.

Question 14

When a firm increases is output, what happens to total costs?

Answer 14

Total costs increase.

Question 15

In the short-run, what happens to average total costs if output increases?

Answer 15

Initially average total cost decreases, but eventually total costs start to rise, because the factors of production cannot cope with the increases output.

Question 16

What happens to average fixed costs per unit, if output increases?

Answer 16

Then average fixed costs would decrease. The AFC curve always slopes downward.

Question 17

What happens to average variable costs of production if labour is the only variable factor of production?

Answer 17

At first average variable costs would decrease as more workers are employed, but eventually costs will rise as labour will become less productive as employment increases.

Question 18

How is average total costs calculated, and what is its curve shape?

Answer 18

-ATC=AFC+AVC
-ATC=TC/output
curve is U shaped.

Question 19

Define long-run average costs and describe why the curve is U shaped.

Answer 19

LRAC is long-run total cost / output.

The curve is U shaped because of economies/diseconomies of scale.

Question 20

Define economies of scale.

Answer 20

Economies of scale occurs when output increases, long-run average costs falls.
It is when an increases in the scale of production leads to a fall in the cost per unit.

Question 21

Describe 4 types of economies of scale.

Answer 21

• technical- generated through changes to the productive process.
• managerial- larger the scale of the firm, the greater the ability to benefit from specialisation.
• marketing- use market power to buy resources cheap in bulk.
• financial- ease of borrowing funds.

Question 22

Define diseconomies of scale.

Answer 22

Diseconomies of scale occur when an increase in output leads to a rise in LRAC.
When a business grows so large that the cost per unit increases.

Question 23

Describe reasons for diseconomies of scale .

Answer 23

• managerial- as a firm grows, the delegation of managerial tasks is harder so leads to bad decisions and can cost firms money.
• communication- as firm grows there may be too many layers of management so staff feel remote and unappreciated so production falls.
• motivational- over specialisation can lead to boredom and workers have little incentive so production falls.

Question 24

Define internal and external economies of scale and describe the difference between them.

Answer 24

Internal- cost saving resulting from growth within the company.
External- cost saving resulting from growth of the industry or market.
Internal is within the firm. External is within the market.

Question 25

When does internal economies of scale occur?

Answer 25

When a firm grows and changes it scale and size.

Question 26

When does external economies of scale occur?

Answer 26

When a firms average costs of production fall due to growth in the market, often due to cluster effects, when lots of firms in the same industry are located close to another and labour and supply is exchangeable.

Question 27

When does external diseconomies to occur?

Answer 27

When the growth of the whole market raises the average cost of production of all firms in the market. When all the firms locate together, they compete and get in each other’s way.

Question 28

Define total revenue.

Answer 28

All the money received by a firm from selling its totlal output.

Question 29

Define average revenue.

Answer 29

Total revenue / output.

AR=TR/output

Question 30

Define profit.

Answer 30

The difference between total sales revenue and total costs of production.
Total profit = total revenue - total costs.

Question 31

What is increasing returns to scale?

Answer 31

When the %change in output is greater than the %change in inputs.

Question 32

What is decreasing returns to scale?

Answer 32

When the %change in output is less than the %chnage in inputs.

Question 33

What is productive efficiency and when does it occur?

Answer 33

When the least amount of scarce resources are used in production.
When marginal cost=average costs.

Question 34

What is allocative efficiency and when does this occur?

Answer 34

When firms give consumers what they want at the lowest possible price.
When price=marginal costs.

Question 35

What is the most productively efficient point on a average cost curve?

Answer 35

When the curve is horizontal, at its lowest point.