Ch 5 & 6 Supply

Question 1

Define– Diminishing returns to scale.

Answer 1

A situation when a proportionate increase in all inputs yields a less than proportionate increase in output.

Question 2

Define– Fixed input.

Answer 2

An input to production that does not vary in the short run. The time for which at least one input cannot be changed actually defines the short run.

Question 3

Define– Long run.

Answer 3

A decision-making time frame over which quantities of all inputs to production can be varied.

Question 4

Define– Output.

Answer 4

The good or service that is the result of the production process (in the case of health services, the service that is delivered).

Question 5

Define– Outcome.

Answer 5

A change in health status as a result of the system processes (in the health services context, the change in health status as a result of care).

Question 6

Define– Production function.

Answer 6

The functional relationship that indicates how inputs are transformed into outputs in the most efficient way.

Question 7

Define– Production possibilities frontier.

Answer 7

The boundary between the combinations of goods that can be produced and those that cannot with the resources available.

Question 8

Define– Returns to a factor.

Answer 8

This measures the addition to output as one factor to production is increased.

Question 9

Define– Returns to scale.

Answer 9

This measures the addition to output as the scale of operations increases in the long run so that all inputs can be varied.

Question 10

Define– Short run.

Answer 10

A decision-making time frame within which at least one input (the fixed input – see above) cannot be varied.

Question 11

Define – Technical (operational) efficiency.

Answer 11

A point at which a producer cannot produce more output without using more of at least one input.

Question 12

Define – Variable input.

Answer 12

An input to production that varies directly with the level of output.

Question 13

Define – supply

Answer 13

the willingness and ability to sell a good at each and every price over a given period of time.

Question 14

Define – supply

It depends on what?

Answer 14

the willingness and ability to sell a good at each and every price over a given period of time.

Depends on many factors that influence the relationship between inputs and outputs (production) and cost of production.

Question 15

What does it mean for a system to be technically inefficient?

Answer 15

It still has the ability to make more outputs without needing more inputs, thus increasing social welfare.

Question 16

What does it mean for a system to be technically efficient?

Answer 16

It’s already being as efficient as it can be. In order to increase the output, need to increase the input. There also exists trade offs, where to make more of something, may mean taking away inputs to make something else.

Question 17

How do we get more output without needing more input?

Answer 17

Improvement in technology that allows for improved efficiency.

Question 18

A “production function” graph plots what?

Answer 18

Plots inputs vs outputs.

Question 19

What is “returns to a factor” compared to “returns to scale”?

Answer 19

returns to a factor– how much additional output when increasing only one factor.

returns to scale– how much additional output when increasing all inputs/ factors by the same proportion

Question 20

What is “returns to a factor” compared to “returns to scale”?

Can “return to scale” occur with long, short or both runs?

Answer 20

returns to a factor– how much additional output when increasing only one factor.

returns to scale– how much additional output when increasing all inputs/ factors by the same proportion. Just in long run because in short runs there are fixed inputs.

Question 21

What is “returns to a factor” compared to “returns to scale”?

Can “return to scale” occur with long, short or both runs?

Answer 21

returns to a factor– how much additional output when increasing only one factor.

returns to scale– how much additional output when increasing all inputs/ factors by the same proportion. Just in long run because in short runs there are fixed inputs.

Question 22

Define– Economic profit.

Answer 22

Total revenue minus total cost and distinct from normal profit.

Question 23

Define– Economies of scale.

Answer 23

The conditions under which long-run average cost decreases

as output increases.

Question 24

Define– Fixed cost.

Answer 24

A cost of production that does not vary with the level of output.

Question 25

Define– Normal profit.

Answer 25

The return a firm receives from inputs such as a director’s role in organizing and running the business. This is part of the firm’s opportunity cost.

Question 26

Define– Producer surplus.

Answer 26

The difference between the amount that a producer receives from the sale of a good and the lowest amount that producer is willing to accept for that good.

Question 27

Define– Scale efficiency.

Answer 27

A situation where the provider is producing at an output level such that average cost is minimized.

Question 28

Define– Variable cost.

Answer 28

A cost of production that varies directly with the level of output.

Question 29

what 3 factors generally explain “economies of scale”?

Answer 29

• increasing returns to scale (how much additional output when increasing all inputs/ factors by the same proportion. Just in long run because in short runs there are fixed inputs.)
• falling factor prices with increased scale (usually associated with ability to bulk buy);
• spreading of fixed costs over a larger output.

Question 30

what 3 factors generally explain “economies of scale”?

Define– economies of scale

Answer 30

• increasing returns to scale (how much additional output when increasing all inputs/ factors by the same proportion. Just in long run because in short runs there are fixed inputs.)
• falling factor prices with increased scale (usually associated with ability to bulk buy);
• spreading of fixed costs over a larger output.
———-
definition– average costs falling as output increases

Question 31

what 2 factors generally explain “diseconomies of scale”?

Define– diseconomies of scale

Answer 31

• decreasing returns to scale;
• increasing factor prices with increased scale (this may result from a scarcity of a
factor to production, for example recruiting doctors to work in isolated areas often requires an increased financial incentive)
————-
Definition– increasing average costs with respect to output

Question 32

Define – economic efficiency

Answer 32

producer is not able to produce more without increasing cost.

Question 33

Define – technical efficiency

Answer 33

when no input can be decreased without also decreasing output

Question 34

What is a supply curve?

Answer 34

• • reflects a producer’s willingness to sell at each price and therefore the cost of production
• • show the relationship between quantity supplied and price

Question 35

What is economic profit?

Answer 35

total revenue minus total cost is greater than zero.

Question 36

What are the main determinants of supply?

Answer 36

• the price of the good;
• the prices of inputs used to produce the good (e.g. raw food, people’s time);
• the prices of related goods;
• expected future prices;
• the number of other suppliers;
• technology.