Background to supply

Question 1

Define fixed factor

Answer 1

An input that cannot be increased in supply within a given time period.

Question 2

Define variable factor

Answer 2

An input that can be increased in supply within a given time period.

Question 3

What is short run?

Answer 3

The period of time over which at least one factor is fixed.

Question 4

What is long run?

Answer 4

The period of time long enough for all factors to be varied.

Question 5

Define total physical product (TPP)

Answer 5

The total output of a product per period of time that is obtained from a given amount of inputs.

Question 6

Define average physical product (APP)

Answer 6

Total output (TPP) per unit of the variable factor in question: APP = TPP/Qv.

Question 7

Define marginal physical product (MPP)

Answer 7

The extra output gained by the employment of one more unit of the variable factor: MPP = ∆TPP/∆Qv.

Question 8

What is technical efficiency?

Answer 8

Where the maximum output is achieved from a given set of inputs.

Question 9

State the law of diminishing marginal returns

Answer 9

When one or more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish.

Question 10

State the relationship between averages and marginals

Answer 10

The marginal is just the ratio of the changes.

Question 11

Define historic costs

Answer 11

The original amount the firm paid for factors it now owns.

Question 12

Define fixed costs (TFC)

Answer 12

Total costs that do not vary with the amount of output produced.

Question 13

Define variable costs (TVC)

Answer 13

Total costs that do vary with the amount of output produced.

Question 14

Define average total cost (AC)

Answer 14

Total cost (fixed plus variable) per unit of output: AC = TC/Q = AFC + AVC.

Question 15

Define average fixed cost (AFC)

Answer 15

Total fixed cost per unit of output: AFC = TFC/Q.

Question 16

Define average variable cost (AVC)

Answer 16

Total variable cost per unit of output: AVC = TVC/Q.

Question 17

Define marginal cost (MC)

Answer 17

The extra cost of producing one more unit of output: MC = ∆TC/∆Q.

Question 18

Explain the opportunity cost of production decisions

Answer 18

The opportunity costs are the implicit and explicit costs that are relevant to that particular decision.

Question 19

State the bygones principle

Answer 19

Sunk costs should be ignored when deciding whether to produce or sell more or less of a product.

Question 20

Define economies of scale

Answer 20

When increasing the scale of production leads to a lower cost per unit of output.

Question 21

Define specialisation and division of labour

Answer 21

Where production is broken down into a number of simpler, more specialised tasks.

Question 22

Define Indivisibility

Answer 22

The impossibility of dividing a factor into smaller units.

Question 23

Define plant economies of scale

Answer 23

Economies of scale that arise because of the large size of a factory.

Question 24

Define Rationalisation

Answer 24

The reorganising of production so as to cut out waste and duplication and generally to reduce costs.

Question 25

Define Overheads

Answer 25

Costs arising from the general running of an organisation, and only indirectly related to the level of output.

Question 26

Define economies of scope

Answer 26

When increasing the range of products produced by a firm reduces the cost of producing each one.

Question 27

Define diseconomies of scale

Answer 27

Where costs per unit of output increase as the scale of production increases.

Question 28

Define external economies of scale

Answer 28

Where a firm’s costs per unit of output decrease as the size of the whole industry grows.

Question 29

What is industry’s infrastructure?

Answer 29

The network that supports a particular industry.

Question 30

Define external diseconomies of scale

Answer 30

Where a firm’s costs per unit of output increase as the size of the whole industry increases.

Question 31

State three long-run decisions for a firm

Answer 31

The scale, location, and techniques of production.

Question 32

Distinguish between returns to scale types

Answer 32

Increasing, constant, and decreasing returns to scale.

Question 33

Describe factors leading to plant economies of scale

Answer 33

Specialisation, indivisible inputs, container principle, efficiency of large machines, by-products, multi-stage production.

Question 34

Describe other possible economies of scale

Answer 34

Organisational, spreading overheads, financial economies, economies of scope.

Question 35

Describe factors leading to diseconomies of scale

Answer 35

Management problems, worker alienation, industrial relations, production-line disruptions.

Question 36

State factors influencing location choice

Answer 36

Transport costs, availability of raw materials.

Question 37

State the cost-minimising condition

Answer 37

(MPP_L)/P_L = (MPP_K)/P_K for two-factor case.

Question 38

Distinguish between time periods in production

Answer 38

Very short run, short run, long run, very long run.

Question 39

Outline assumptions underlying long-run average costs

Answer 39

Factor prices given, state of technology and factor quality given, least-cost factor combination.

Question 40

Explain the relationship between short-run and long-run average costs

Answer 40

In the long run, firms can adjust all inputs, leading to new SRAC curves.

Question 41

Define minimum efficient scale (MES)

Answer 41

The scale beyond which no significant economies of scale can be achieved.

Question 42

Define total revenue (TR)

Answer 42

A firm’s total earnings from a specified level of sales within a specified period.

Question 43

Define average revenue (AR)

Answer 43

Total revenue per unit of output, equal to price when all output is sold at the same price.

Question 44

Define marginal revenue (MR)

Answer 44

The extra revenue gained by selling one more unit per period of time.

Question 45

Define price taker and price maker

Answer 45

A firm that cannot/can influence the market price.

Question 46

Define the profit-maximising rule

Answer 46

Profit is maximised where marginal revenue equals marginal cost.

Question 47

Define normal profit

Answer 47

The opportunity cost of being in business.

Question 48

Define supernormal profit

Answer 48

The excess of total profit above normal profit.

Question 49

Explain the short-run and long-run production decisions

Answer 49

In the short run, firms should produce if they can cover variable costs; in the long run, they should produce if they can cover all costs including normal profit.