Cost of production Flashcards
Outlined the factors of production employed by a business. In each case give the price/earning power of the factor of production.
Land - These are the natural resources used in the production of goods and services. The price of land is rent.
Capital - These are anything man made used in the production of goods and services. The price of capital is the rate of interest.
Labour - This refers to the human effort activity used the production of goods/services. The price of labour is wages.
Enterprise - This is the controlling factor and involves combining land, labour and capital into production units. The earning power of enterprise is profit.
Distinguish between the short run and long run in economics
Short run - This is a period of time over which at least one of the factors of production is fixed in quantity.
Long run - This is the period of time which is sufficiently long enough to allow all the factors to be varied in quantity.
Explain the reasons for the shape of the short run average cost curve.
Fixed costs spread over larger output - As the number of units produced increases, unit costs fall.
Specialisation - As existing workers specialise in a small number of tasks they become very efficient resulting in lower unit costs.
Law of diminishing marginal returns - This applies after point X resulting in creasing amounts of variable factors used per unit produced, resulting in higher unit costs.
State the law of diminishing marginal returns.
Law of diminishing marginal returns - This states that when increasing amounts of a variable factor are used in conjunction with a fixed factor eventually a point is reached where output per variable factor begins to fall or diminish.
Explain the relationship between the short and long run average cost curve
Each SRAC represents a different factory size/ scale of operation for the firm. The firm is trying to maxamise profits and so operates at the lowest point on each SRAC. By joining together the lowest point on each SRAC we derive the LRAC as depicted by the red line above.
Explain the reasons for the shape of the long run average cost curve.
In the early stages of production, economies of scale are dominant.
In the latter stages of production, diseconomies of scale are dominant.
i)Define economies of scale
Define diseconomies of scale
i) Economies of scale - These are cost decreases, resulting in a lower average cost of production and experienced by the firm when it or the industry grows in size.
Diseconomies of scale - These are cost increases, resulting in a higher average cost of production and experiences by the firm when it or the industry grows in size.
Distinguish between internal and external economies of scale, giving two examples in each case.
Internal economies of scale - Forces within a firm resulting in lower unit costs and experienced by the firm when it grows in size.
Examples -
Specialisation - As existing workers specialise in a small number of tasks they become more proficient resulting in lower unit costs.
Buying economies - As a business grows in size it can avail of bigger discounts from bulk buying.
Financial economies - As a firm grows in size banks may perceive them as less of a risk and so offer them more attractive/lower rates of interest.
External economies of scale - These are the forces outside a firm which result in lower unit costs and experienced by all firms as the industry grows in size.
Examples -
Disintegration - As an industry grows a component may be isolated and produced by an individual firm. This firm benefits from massive economies of scale and can produce the component cheaper than what it would be for all firms to do this themselves.
Specialised services - As an industry grows in size service may be isolated. Firms within an industry can contract out this service at a lower cost.
Improved infrastructure - As an industry grows the government will want to nourish that industry by improving the infrastructure around it.
Distinguish between internal and external diseconomies of scale, giving two examples in each case.
Internal diseconomies of scale - These are forces within a firm that result in higher unit costs and experienced by the firm as it grows in size.
Examples -
Poor staff moral - Workers may become bored from the repetition of tasks under specialisation. When this happens productivity falls and costs go up.
Higher administration cost - As a business grows it will hire more workers and require additional office space. Thus wage bill will rise as will utility charges, insurance premiums and stationary.
Slower decision making - As a business grows communication and decision making between the different levels of management will get slow.
External diseconomies of scale - These are forces outside a firm that result in higher unit costs and experiences by all firms as the industry grows in size.
Examples -
Labour - As an industry grows there are more firms competing for labour which will drive up the price of labour i.e the wage rate.
Capital - As an industry grows in size there are more firms competing for prime retail/office space. This drives up its cost.
Distinguish between normal profit and supernormal profit.
Normal profit - This is minimum level of profit a firm must earn for production to continue in the long run. It occurs where average revenue equals average cost,
Supernormal profit - This is the reward to those firms who are innovate and cost efficient. It occurs where average revenue is greater than average cost.
Distinguish between social costs and social benefits.
Social costs - This is the cost to society from the existence of an economic activity.
Social benefits - This is the benefit to society from the existence of an economic activity.
Distinguish between explicit costs and implicit costs.
Explicit costs - These are the costs paid by a firm for its inputs and are recorded by an accountant.
Implicit costs - These are non-monetary costs that are difficult to quantify such as time invested in starting a business.
Discuss the reasons why small firms continue to survive in the Irish economy.
Small size of the market - The restricted size of the market does not facilitate the operation of large scale businesses in many cases.
Personal Services - Many consumers have a desire for the personal attention in the provision of goods and services provided by small firms.
Niche markets - The type of product or service being supplied makes it more suitable to a smaller business type.
Consumer loyalty - Many consumers are loyal to small businesses as they recognise the vital role they play in the viability of a community.
Outline the social costs and social benefits of the governments decision to build a new rapid transit system from Dublin city centre to Dublin airport and Swords. [40 marks]
Social costs -
Pollution - The construction of this rapid transit system will result in air and noise pollution for residents living along this line.
Rising land prices - Once completed the price of property along this line may increase. As result people who grew up in these areas may be forced to live elsewhere.
Traffic congestion - While this transit system is being constructed, those workers travelling from the north side to the city centre may be forced to take detours resulting in a longer commute.
Disfigurement of the landscape - The construction of this rapid transit system may result in unsightly changes to the landscape.
Social benefits -
Quicker commute - Those workers living in the north side will have a quicker and less stressful commute to and from worker.
Job creation - The construction of the rapid transit system should create jobs for local people and will play an important role in attractive foreign direct investment.
Higher standard of living - Those living in the north side and working in the city centre should have a better work life balance as their commute should be shorter.
Safer roads - More people should use the rail to commute rather than the road. With less vehicles on the road accidents should fall.
