Chapter 3

Question 1

what is a fixed cost

Answer 1

costs that don’t vary with output

Question 2

what is a variable cost

Answer 2

costs that vary with output

Question 3

what is a sunk cost

Answer 3

costs that cannot be recovered on leaving industry, e.g. advertising

Question 4

what are semi-variable costs

Answer 4

costs like labour which to some extent depend on output

Question 5

what is a marginal cost

Answer 5

This is the cost of producing an extra unit

Question 6

how do you work out average fixed costs

Answer 6

fixed costs / quantity

Question 7

true or false do fixed costs always remain the same

Answer 7

True
However many goods are produced, fixed costs will remain constant

for example, if a new factory costs £1 million, this cost is unaffected by the number of goods produced.

Question 8

how to calculate average variable costs

Answer 8

variable costs / quantity

Question 9

what is a firm going to experience in the short run due to costs

Answer 9

in the short run, a firm is likely to experience diminishing marginal returns

Question 10

what happens as firms employ more labour

Answer 10

As Firms employ more workers there will come a point where extra workers have a declining marginal product

Question 11

what can firms vary in the long run

Answer 11

a firm can vary all factors of production

Question 12

what does it mean if firms can vary factors of production

Answer 12

the firm will not face diminishing return

Question 13

as capital can vary in the long run what does this mean the business may experience

Answer 13

as the amount of capital can vary the firm may experience economies or diseconomies of scale

Question 14

what are factors that affect costs of production

Answer 14

wage costs
labour productivity
exchange rate
raw materials
tax
bureaucracy and administration
transport costs
interest rates

Question 15

how do wage costs affect the cost of production

Answer 15

For labour intensive industry (service sector/manufacturing of clothes) a small change in wage costs has a big impact on the overall costs of firms.

Question 16

how does labour productivity affect the cost of production

Answer 16

New technology which improves output per worker enables the firm to cut back on employing workers, leading to lower costs

Question 17

how does exchange rate affect the cost of production

Answer 17

A rise in the exchange rate makes imports cheaper. If the firm needs to import raw materials, an appreciation can reduce the cost of production

Question 18

how do raw materials affect the cost of production

Answer 18

A rise in the cost of raw materials, e.g. oil, plastic, and metal – will increase the cost of firms. Nearly all firms will be affected by higher oil prices – which increase the cost of transport.

Question 19

how can taxes affect the cost of production

Answer 19

Higher national insurance (tax on workers) raises cost

Question 20

how can bureaucracy and administration affect costs of production

Answer 20

Firms which have to fill in paperwork and complicated tax returns will have higher costs. This could be significant for firms who export but have to pass through administrative hurdles (non-tariff barriers)

Question 21

how can interest rates affect costs of production

Answer 21

Firms who borrowed to invest will be affected by an increase in interest rates – which raises the cost of loan repayments

Question 22

what is an opportunity cost

Answer 22

the next best alternative e.g gap year vs going to university

Question 23

what is a total cost

Answer 23

all costs involved in producing a particular level of output

Question 24

how do costs change in the short run vs the long run

Answer 24

In the short run, at least one cost is fixed; in the long run all are variable

Question 25

what do higher fixed costs lead to for businesses in terms of profit

Answer 25

The higher level of fixed costs in a business, the higher must be the achieved output in order to achieve normal profits

Question 26

what does a rise in short run output lead to for variable costs

Answer 26

An increase in short run output will cause total variable cost to rise

Question 27

define production

Answer 27

Production converts inputs or factor services into outputs of goods and services

Question 28

when do short run production occur

Answer 28

occurs when a firm adds variable factors of production to fixed factors of production

Question 29

when do long run production occur

Answer 29

occurs when a firm changes the scale of ALL the factors of production

Question 30

how is production measured

Answer 30

Production is measured by the value of output of goods and services

Question 31

what is productivity

Answer 31

Output per unit of input

Question 32

how is productivity measured

Answer 32

It's a way of measuring how efficiently a company is producing its output.

Question 33

what is labour productivity

Answer 33

output per worker

Question 34

what is capital productivity

Answer 34

output per unit of capital

Question 35

what does a fall in labour productivity lead to

Answer 35

a fall in labour productivity leads to a rise in firms costs of production

Question 36

what does high productivity allow a company to do

Answer 36

Higher productivity allows a company to pay higher wages and achieve increased profits at the same time

Question 37

what can improve labour productivity

Answer 37

Better training More experience Improved technology Specialisation Happy in work

Question 38

what is specialisation

Answer 38

Specialisation is when we concentrate on a product or task

Question 39

what is the division of labour

Answer 39

The division of labour occurs where production is broken down into many separate tasks

Question 40

what can division of labour improve

Answer 40

Division of labour can raise output per person so people become proficient through constant repetition of a task – called learning by doing

Question 41

what does division of labour lead to

Answer 41

a gain in productivity

Question 42

advantages of specialisation

Answer 42

Learn to become better at the task Better quality and higher quantity of goods produced More efficient production – helping to tackle scarcity Training costs are reduced

Question 43

disadvantages of specialisation

Answer 43

Repetitive tasks – boredom Countries become less self sufficient Lack of flexibility High worker turnover

Question 44

factors affecting labour productivity

Answer 44

-Quality of the management in the business -Investment in apprenticeship/training to boost labour skills -A degree of competition in a market/industry -Advances in production technology -Specialisation (division of labour) within a business -Higher business investment in new capital inputs -Level of demand for a product in a market – using up spare capacity -Having a high quality national infrastructure including transport

Question 45

what are economies of scale

Answer 45

Economies of scale are when an increase in scale of production leads to a fall in average costs

Question 46

what are diseconomies of scale

Answer 46

Diseconomies of scale are when an increase in scale of production leads to a rise in average costs

Question 47

whats the difference between INTERNAL and EXTERNAL economies and diseconomies of scale

Answer 47

internal - due to growth of an individual firm External - due to growth of an entire industry

Question 48

what is internal economies of scale

Answer 48

When an individual firm grows they can benefit from lower average costs

Question 49

what leads to internal economies of scale

Answer 49

purchasing technical managerial financial marketing

Question 50

what is purchasing internal economies of scale

Answer 50

discounts for buying in bulk

Question 51

what is technical internal economies of scale

Answer 51

more advanced production equipment can be purchased

Question 52

what is managerial internal economies of scale

Answer 52

employ more specialist managers, as business grows larger

Question 53

what is financial internal economies of scale

Answer 53

access cheaper loans and other sources of finance – bigger firms are seen as lower risk, as less chance of failure - lenders give more favourable rates of interest

Question 54

what is marketing internal economies of scale

Answer 54

marketing is usually a fixed cost which can be spread over more units of output – advertising is a sunk cost (costs that cannot be recovered on leaving industry)

Question 55

what are external economies of scale

Answer 55

When the whole industry grows in an area firms can benefit from lower average costs

Question 56

what lead to external economies of scale

Answer 56

-A larger pool of skilled labour -Investment in a better infrastructure -Suppliers locating nearby and reputation

Question 57

what are internal diseconomies of scale

Answer 57

When an individual firm grows too quickly or too large, it may find average costs beginning to rise

Question 58

what causes internal diseconomies of scale

Answer 58

-Communication difficulties -Coordination issues -Control problems – labour

Question 59

what are external diseconomies of scale

Answer 59

When the whole industry in an area grows too quickly or too large, firms may find average costs beginning to rise

Question 60

what causes external diseconomies of scale

Answer 60

Pollution and traffic congestion Competition driving up cost of factors of production