4 Production, costs and revenue (MICRO)

Question 1

Average cost calculation

Answer 1

• the cost per unit
• total cost/output

Question 2

Fixed costs definition

Answer 2

costs which do not vary as the level of production increases or decreases

Question 3

How is short-run defined?

Answer 3

a period of time when at least one of the factors of production is fixed

Question 4

How is long-run defined?

Answer 4

a period of time when all factors of production are variable

Question 5

Total costs calculation

Answer 5

• sum of all costs of production
• fixed costs + variable costs

Question 6

Marginal revenue definition

Answer 6

additional revenue gained by a firm from selling an additional unit of output

Question 7

Define diminishing marginal returns to a fixed factor

Answer 7

• adding an additional factor of production results in smaller increases in output
• when one input in the production of a commodity is increased while all others are held fixed, eventually the additional input results in no extra product

Question 8

Define diseconomies of scale

Answer 8

An economic disadvantage such as increase in costs arising from an increase in the size of an organisation

Question 9

Define specialisation and give the main benefit of specialised workers

Answer 9

• a particular area in which a worker can become an expert in
• increased productivity

Question 10

What are the four functions of profit?

Answer 10

• finance for investment
• market entry
• demand for factor resources
• signals about the health of the economy

Question 11

What is the law of diminishing marginal returns?

Answer 11

as successive units of a variable factor are applied to a fixed factor, the total output will increase but at a diminishing rate

Question 12

What is meant by the division of labour?

Answer 12

where production is broken down into many separate tasks

Question 13

Give 4 limitations of the division of labour

Answer 13

• unrewarding: repetitive work that requires little skill lowers motivation and hits productivity
• mass produced standardised goods lack variety for consumers
• many people may choose to move to less boring creating a problem of high worker turnover
• some workers may receive little training and may not be able to find alternative jobs if they find themselves out of work - they may then suffer from structural unemployment

Question 14

What are the 4 gains for specialisation

Answer 14

• higher output: total production of goods and services is raised and quality can be improved
• variety: consumers have access to greater variety of higher quality products
• a bigger market: specialisation and global trade increase the size of the market offering opportunities for economies of scale
• competition and lower prices: increased competition acts as an incentive to minimise costs, keep prices down and therefore maintains low inflation

Question 15

What are the 6 different types of economies of scale?

Answer 15

• technical economies: invest in specialist technology
• specialisation of workforce: increased productivity
• marketing economies - spread fixed costs over sectors
• purchasing economies - bulk buy
• financial economies - lower interest rates
• risk-bearing economies