4.1.4 — Production, Costs And Revenue

Question 1

What are some differences between the short and long run (scale of production)?

Answer 1

Short run:
- scale of production is fixed
- quantity of Labour may be flexible
- quantity of capital is fixed

Long run:
- scale of production is flexible
- all costs are variable

Question 2

What is the marginal return of a factor?

Answer 2

I.e Labour, is the extra output derived per extra unit of the factor employed

Question 3

What is the average return of a factor?

Answer 3

The output per unit of input (output per worker over a period of time)

Question 4

What is the total return of a factor?

Answer 4

The total output produced by a number of units of factors (i.e labour) over a period in time

Question 5

What is the law of diminishing returns?

Answer 5

• diminishing returns only occur in the short run
• variable factor could be increased in the short run i.e firms might employ more labour which will be less productive over time
• therefore total output still rises but it increases at a slower rate
• links to how productive Labour is
• the law assumes firms have fixed factor resources in the short run and that the state of technology remains constant

Question 6

What does it mean to return to scale?

Answer 6

The change in output of a firm after an increase in factor inputs

Question 7

At what point does returns to scale increase?

Answer 7

When the output increases by a greater proportion to the increase in inputs
I.e if input doubles and output quadruples there is said to be increasing returns to scale

Works vice versa

Question 8

Define constant returns to scale

Answer 8

When output increases by the same amount that input increases by

Question 9

What is marginal revenue?

Answer 9

Marginal revenue is the extra revenue earned from the sale of one extra unit.

Difference between total revenue at different levels of output

Question 10

Under what condition does marginal revenue equal average revenue?

Answer 10

When demand is elastic

Question 11

How is marginal revenue calculated?

Answer 11

Change in total revenue
————————————
Change in quantity sold

Question 12

Define normal profit

Answer 12

Minimum reward required to keep entrepreneurs supplying their enterprise (covers opportunity cost of investing funds into the firm compared to elsewhere

Question 13

Formula for normal profit?

Answer 13

When

Total revenue = total costs

Question 14

Is normal profit considered to be a cost or not?

Answer 14

It is considered a cost

Question 15

Define supernormal profit

Answer 15

AKA abnormal profit / economic profit
The profit above normal profits which exceeds the value of opportunity cost of investing funds into the firm

Question 16

Formula for supernormal profit?

Answer 16

Total revenue > total costs

Question 17

Bullet point some roles of profit in a market economy

Answer 17

• in free market, profit is the reward that entrepreneurs yield when they make risks
• entrepreneurs want to avoid loss and make profit (to continue innovating) to reduce unit costs and maximise their profits
• profits can be retained (kept within firm) which acts as a source of finance for firms which avoids the cost of interest payments
• profit acts as a signal to firms and consumers (supernormal profit signals to firms to enter the market) which increases market supply and reduces cost (assumes low entry barriers)
• FOP typically get used in markets where the rate of return is higher

Question 18

Define invention

Answer 18

The process of creating a new product or new way to make a product

Question 19

Define innovation

Answer 19

The act of improving or contributing to existing products

Question 20

Bullet point ways technological change can affect methods of production

Answer 20

• results in improvement of efficiency and productivity which could lower production costs
• leads to the development of new products
• increased quality
• development or destroying of markets
• creative destruction

Question 21

What is creative destruction?

Answer 21

Coined by the economist Schumpeter, is the idea that new entrepreneurs are innovative which challenges existing firms. These firms become more productive to compete which forces the least productive firms out of the market.

I.e netflix vs blockbuster

Question 22

What does creative destruction result in for an economy?

Answer 22

Expansion of economies productive potential

Question 23

How can technological change influence the structure of markets?

Answer 23

• monopolies don’t have an incentive to innovate, as they have no competition meaning they may be inefficient with higher costs
• oligopolies tend to have a higher incentive to innovate as they are earning supernormal profits and try to get ahead of their competitors. Technological change is quite fast

Question 24

Why does increasing returns to scale occur?

Answer 24

Because of economies of scale

Question 25

What is increasing returns to scale?

Answer 25

When output increases by a greater proportion to the increase in inputs (I.e. if input doubles, output quadruples)

Question 26

So price taker firms have a vertical or horizontal AR curve?

Answer 26

Horizontal which shows the perfectly elastic demand for their goods

Question 27

What is the relationship between average revenue and marginal revenue?

Answer 27

When demand is perfectly elastic, marginal revenue = average revenue

Question 28

What are some alternative objectives of profit for firms?

Answer 28

• customer service
• high quality goods
• survival
• satisfying customers

Question 29

Define technical change

Answer 29

The overall effect of invention, innovation and the diffusion or spread of technology in the economy

Question 30

Define disruptive innovation

Answer 30

Something that helps to create a new market, but it it disrupts an existing market over several years as a result, thereby displacing an earlier technology

Question 31

Define creative destruction

Answer 31

Used to describe capitalism evolving and renewing itself over time through new technologies and innovations, replacing old technologies and innovations

Question 32

Define mechanisation

Answer 32

The process of moving from labour-intensive production to a capital-intensive method of production:
MORE MACHINES, FEWER WORKERS

Question 33

Define automation

Answer 33

Automatic control where machines operate other machines