chapter 8: Production and costs

Question 1

what is the driving force of the modern economy

Answer 1

efficiency (efficient production)

Question 2

what are the forms of efficient production

Answer 2

cost reduction

new technologies

margers and acquisitions

Question 3

cost reduction

Answer 3

may come through collapsing jobs

or outsourcing particular jobs to lower-wage economies

Question 4

new technologies

Answer 4

Can we replace old work patterns with the help of communications? Or with robots?

Question 5

mergers and acquisitions

Answer 5

justified by claiming that a merged company will be more efficient

Question 6

production function

Answer 6

technological relationship

specifies how much output can be produced with specific amounts of inputs

Question 7

technological efficiency

Answer 7

maximum output is produced with the given set of inputs

Question 8

economically efficient production structure

Answer 8

produces output at least cost

Question 9

what are the types of time frames

Answer 9

short run

long run

very long run

Question 10

short run

Answer 10

At least one factor of production is fixed

usually we consider capital to be fixed cost and labour variable cost

ex: We can increase output - ‘teach more students’ – by employing temporary teachers, and using classrooms outside normal hours

Question 11

long run

Answer 11

All factors of production can be adjusted

ex: perhaps we will build more classrooms

Question 12

very long run

Answer 12

New technology appears

another ex again with students: and we teach additional students on-line and so avoid adding new physical capital

Question 13

Types of product in a short run production

Answer 13

total product (TP)

Marginal product (MP)

Average product (AP)

Question 14

Total product (TP)

Answer 14

the relationship between total output (Q) and the number of workers (L) employed holding the capital stock fixed

It states that output is a function of L, with K fixed:

Q= f(L)

Question 15

Marginal Product (MP)

Answer 15

addition to output produced by each additional worker

MP = ΔQ / ΔL

Question 16

Average product (AP)

Answer 16

relationship between output per worker and the number of workers employed

AP = Q / L

Question 17

law of diminishing returns

Answer 17

With capital fixed, marginal product must eventually decline

you hire too many people who get paid the same

productivity declines cause theres too many unrproductive staff

Question 18

What happens if the marginal product (MP) is bigger than Average product (AP)

Answer 18

MP > AP then AP is increases

Question 19

What happens if the marginal product (MP) is smaller than Average product (AP)

Answer 19

MP < AP then AP decreases

Question 20

Where does the MP curve interest the AP curve

Answer 20

At the maximum of the AP curve

Question 21

Type of costs in the short run

Answer 21

fixed costs

variable costs

total costs

marginal costs

Question 22

fixed costs (FC)

Answer 22

Costs that are independent of the level of output

ex: Overhead costs or research and development

Average fixed cost (AFC):

AFC = FC/Q

Question 23

variable costs (VC)

Answer 23

Costs that are directly related to the output produced

Example: Labour costs, material costs

Average variable cost (AVC)

AVC = VC/Q

Question 24

total costs (TC)

Answer 24

vertical Sum of fixed costs and variable costs

TC = FC + VC

Average Total Cost (ATC) is TC per unit of output

ATC = TC/Q
ATC = AFC + AVC

Question 25

Marginal cost (MC)

Answer 25

The cost of producing each additional unit of output MC = ΔTC/ΔQ Also MC = ΔTVC/ΔQ because fixed costs are fixed

Question 26

where does marginal costs (MC) intersect ATC and AVC

Answer 26

at their minumum When MC = ATC, then ATC rises Same relationship between MC and AVC

Question 27

MP intersects AP at max AP MC intersects ATV and AVC at their minimum is there a relationship?

Answer 27

yeeee boooy when productivity is at highest cost The MC is the ‘flipside’ or inverse of the MP the AVC is the ‘flipside’ or inverse of the AP

Question 28

sunk cost

Answer 28

fixed cost that cannot be recovered, even via a shutdown ex: Mining operations - setup costs are ‘sunk’ and usually form a substantial component of total costs Not all fixed costs are sunk Ex: machinery that has been purchased may have a market value

Question 29

what permits all factors of production to vary

Answer 29

long-run analysis

Question 30

scale of output

Answer 30

the level of production given that the capital stock capital stock can be increased or decreased to fit the expectations for sales in the long run

Question 31

types of scales in the long run production and costs

Answer 31

scale of output increasing returns to scale constant returns to scale decreasing returns to scale minimum efficient scale

Question 32

increasing returns to scale (IRS)

Answer 32

When all inputs are increased by a given proportion, output increases more than proportionately at the beginning of the long run ATC curve implies declining LAC LMC < LAC

Question 33

constant return to scale (CRS)

Answer 33

Output increases in direct proportion to an equal proportionate increase in all inputs around the middle of the long run ATC curve where LAC = LMC

Question 34

decreasing returns to scale (DRS)

Answer 34

An equal proportionate increase in all inputs leads to a less than proportionate increase in output at the end of the long run ATC curve implies increasing LAC LMC > LAC

Question 35

minimum efficient scale

Answer 35

A threshold size (operating level) such that no further economies of scale can be realized

Question 36

what is the long run ATC curve? | what does it represent In a graph?

Answer 36

the lower envelope of all possible short-run ATC curves

Question 37

what results in a declining LAC?

Answer 37

If the prices of K and L are fixed Increasing returns to scale (IRS) results in a declining LAC (long run average cost)

Question 38

what results in a increasing LAC?

Answer 38

CRS implies constant LAC (long run average cost) and decreasing returns to scale (DRS) implies increasing LAC

Question 39

how are the returns to scale defined

Answer 39

defined in terms of the LAC (long run average cost) curve ex: A phase of linearly declining MC followed by constant MC followed by linearly increasing MC

Question 40

what is required to spread the higher capital costs?

Answer 40

high output volumes basically economies of scale

Question 41

where does the LRAC have to intersect LRMC

Answer 41

at minimum of LRAC

Question 42

technological change and globalization

Answer 42

Reduce costs and increase the point of minimum efficient scale graphically this shifts the minimum of the LRAC rightwards and downwards

Question 43

clusters and externalities

Answer 43

Groups of like firms or workers exchanging information and ideas ex: Silicon Valley

Question 44

learning by doing

Answer 44

Costs decline over time due to learning incumbents have a cost advantage

Question 45

economies of scope

Answer 45

Multiproduct supply may be less costly than single product supply

Question 46

what can technological change achieve regarding costs?

Answer 46

reduces the unit production cost for any output produced may also increase the minimum efficient scale (MES) threshold

Question 47

can we measure the marginal productivity of individual workers?

Answer 47

nah boy, the marginal productivity of a team

Question 48

When doe the marginal Product reach its maximum? (if there is relatively gyu production)

Answer 48

when the slope of the Total Product curve is at the max steepness (if there is relatively gyu production)

Question 49

when is marginal product at zero? (if there is relatively gyu production)

Answer 49

when the Total Product curve reaches its max | if there is relatively gyu production