Cost, revenue

Question 1

Explain the shape of MP/MC

Answer 1

1. As more variable factor is added, initially MP rises, firms benefits from division of labour, specialisation, increase in efficiency, increase in MARGINAL RETURNS
2. labour to capital ration increases, diminishing marginal returns

Question 2

Link MP with TP

Answer 2

when MP is rising, TP is rising
when MP is highest, steepest gradient of TP
when MP=0, TP max.
MP negative, TP falls

Question 3

Link MP with AP

Answer 3

MP>AP, AP rises (increasing average returns)

MP

Question 4

What is the law of diminishing returns?

Answer 4

As more of a variable FOP (labour) is employed with a fixed FOP (capital), a point will be reached where MP will decline. This will cause TP to rise by a DIMINISHING amount

Question 5

Link MC with TC, VC

Answer 5

When MC is low, costs are rising slowly, so VC and TC has shallower gradient. When MC is high, costs are rising quickly, so gradient of VC and TC is steeper

Question 6

Why MC falls as MP rises?

Answer 6

• MP=change in TP/change in Q (L)
• TP rises at faster rate than rise in labour, due to increasing marginal return due to economic reasons
• MC=change in TC/change in Q
• TC rises as more labour employed, but Q produced increases at faster rate than rise in TC, due to increase in productivity and efficiency.

Question 7

ATC is also known as?

Answer 7

AC, SRAC (short run average cost curve)

Question 8

Explain the relationship between ATC, AFC and AVC

Answer 8

ATC=AFC+AVC, when both of AFC and AVC is falling due to increasing marginal return, ATC falls, the impact on ATC depends on the relative strength.
— as output increases, the rise in AVC outweigh the fall in AFC, ATC begins to rise
— the gap between AVC and ATC is AFC

Question 9

Explain the relationship between MC and ATC, MC and AFC?

Answer 9

If MC>ATC, ATC rises. When MC is low, costs are rising slowly so AVC and ATC has shallower gradient, when MC is high, costs are rising quickly so steeper gradient. Therefore, MC cuts AVC and ATC at their LOWEST POINTS

MC is unrelated to AFC since MC measures changes in costs and FC does not change with output.

Question 10

Link MC with AVC

Answer 10

Reflection of MP and AP
when MCAVC, AVC rises, (decreasing average returns)
MC cuts through bottom of AVC

Question 11

What is the link between diminishing returns and economies of scale?

Answer 11

• diminishing returns in SR

- EoS in LR

Question 12

Explain the shape of LRAC diagram

Answer 12

As the firm expand in size, falling AC until it achieves optimal size, productive efficiency* is maximised — LRAC minimised — Any further increase in scale of production leads to falling efficiency and rise in AC

Question 13

What is return to scale? What does it indicate?

Answer 13

A ratio of change in inputs to the change in output (in %)

With increasing returns to scale, this leads to falling AC, leads to EoS

Question 14

What is minimum efficient scale (MES)?

Answer 14

• the lowest level of output where LRAC is minimised

Question 15

What is meant by a high MES?

Answer 15

• industry dominated by a small number of large firms
• only large firms can obtain maximum efficiency, smaller firms competed out
• high barriers to entry, firms producing low output will not be able to compete
• uncontestable market, competition restricted

Question 16

What is meant by a low MES?

Answer 16

• large no. of firms
• max. efficiency can be gained by small firms at lower output
• EoS will not be a particular barrier to entry
• industry is more contestable and more competitive

Question 17

What is EoS?

Answer 17

Falling in LRAC as output increases

Question 18

What are some types of EoS?

Answer 18

• technical
• purchasing
• marketing
• managerial
• technological
• financial
• risk-bearing

Question 19

What are some types of internal DoS?

Answer 19

• lack of coordination
• lack of control (hierarchy)
• lack of communication
• demotication

Question 20

How to avoid DoS?

Answer 20

1) HR management
- improvements in recruitment, training
2) performance related pay schemes (PRP)
3) Outsourcing
- reducing costs whilst retaining control over production, but may impact on job security

Question 21

What are some types of external EoS?

Answer 21

• investment in R&D
• investment in transport infrastructure
• agglomeration
• tax
• labour cost

Question 22

Where is max profit on TC, TR curve, how is profit max condition derieved

Answer 22

• biggest distance between TC and TR

- MC=MR (D)

Question 23

Why demand curve differ between price taker and price maker? (D and R)

Answer 23

Price taker
- demand curve is perfectly elastic cuz they receive the same price for every output

Price maker
- demand curve is downward sloping, can set either price or quantity

Question 24

The differences in the relationship between TR and D, for price taker and price maker, the elasticity of the D curve

Answer 24

Price taker
- revenue=quantity x price, MR=AR=D and equals to market price, TR increases by constant amount

Price maker

• highest point on TR = 0 MR, unitary PED on AR
• TR rises then falls, as P falls, TR rises, implies % fall in price < % rise in Qd, D is PED elastic up to when MR=0 at max.TR
• as P continues to fall, TR falls, % increase in Qd < % fall in P, PED inelastic
• TR decreasing suggests MR negative

Question 25

What is normal profit (transfer earnings), abnormal profit (economic rent) and subnormal profit? Condition of each type is made?

Answer 25

Normal: AR=AC, the minimum amount of profit required to keep a firm operating in the industry

Abnormal: AR>AC, any profit made over and above normal profit

Subnormal: AR