Costs

Question 1

Theory of Production

Answer 1

an effort to explain the principles by which a business firm decides how much of each commodity that it should sell/it will produce, and how much of each kind of labour, raw material, fixed capital good, etc., that it employs

Question 2

Fixed costs

Answer 2

a cost that does not change with an increase or decrease in the number of goods or services produced.
Fixed costs may include lease and rental payments, insurance, and interest payments.

Question 3

Variable costs

Answer 3

Variable costs change based on the amount of output produced. Variable costs may include labor, commissions, and raw materials. Variable costs rise as production increases and fall as production decreases.

Question 4

Main Sectors of an Economy

Answer 4

Primary, Secondary, Tertiary

Question 5

Primary Sector

Answer 5

this involves the extraction of raw materials from the earth
e.g. Mining, Fishing, Quarrying, Forestry.

Question 6

Secondary Sector

Answer 6

the operations of this sector involve the manipulation of the raw materials from the primary production operations.
e.g. Food processing, manufacturing, construction.

Question 7

Tertiary Sector

Answer 7

the operations of this sector involve the provision of services.
e.g. health care, banking, insurance

Question 8

Fixed Factors

Answer 8

Fixed factors are those that do not change as output is increased or decreased.
e.g. offices, factories, machinery, computer systems

Question 9

Variable Factors

Answer 9

Variable factors are those that do change with output, which means more are employed when production increases, and less when production decreases.

e.g. labour, energy, and raw materials directly used in production.

Question 10

Short Run- Law of Diminishing Returns operates in the short run.

Answer 10

The short run is a concept that states that, within a certain period in the future, at least one factor of production is fixed while others are variable. (unique to a firm, industry, etc)

Question 11

Long Run

Answer 11

The long run is a period of time in which all factors of production are variable.

Question 12

Decision Making in Short Run

Answer 12

Only operating decisions are made
e.g. the quantity of raw materials to buy, the number of workers to hire.

Question 13

Decision Making in Long Run

Answer 13

Planning decisions are made
e.g. expansion and entering new markets

Question 14

Law of Returns To Scale- The Law of Returns to Scale operates in the long run.

Answer 14

the change in output of a firm or industry that results from an increase in all inputs.

Question 15

Economies of Scale

Answer 15

the benefits that accrue to a firm as a result of increasing its level of output.

Question 16

Types of Economies of Scale

Answer 16

Technical economies of scale (Technological)
Marketing economies of scale
Financial economies of scale
Managerial economies of scale
Risk-bearing economies of scale

Question 17

Diseconomies of Scale

Answer 17

the drawbacks that a firm suffers as a result of increasing its level of output.

Question 18

Internal Economies of Scale

Answer 18

occur inside of the firm. An internal economy of scale measures a company’s efficiency of production.

Question 19

Internal Economies of Scale- Advantages

Answer 19

1. Larger firms can afford to hire specialised labour and capital resources.
2. Larger firms can engage in mass production.- Technical or Technological Economy of Scale.
3. Large companies can negotiate a lower interest rate when they borrow money.- Financial Economy of Scale.

Question 20

Internal Diseconomies of Scale- Disadvantages

Answer 20

1. Getting too big. You may have the spoilage or wastage of stock.
2. Management inefficiencies.
3. Bureaucracy- the decision-making process is complicated or complex.

Question 21

External Economies of Scale

Answer 21

External Economies of Scale occur from outside of the firm.
They occur in the industry, in the economy, or in the global economy and all firms benefit.

Question 22

External Economies of Scale- Advantages

Answer 22

1. Government spending that improves infrastructure that would lower transportation costs for all firms.
2. Improvements in education and training that will increase labour productivity in the labour force and all firms will enjoy a fall in their LRAC.

Question 23

External Economies of Scale- Disadvantages

Answer 23

An inefficient police force can allow for increasing crime, which forces firms to pay more for security.
An increase in the minimum wage by the government will increase the labour cost for all firms.

Question 24

Demand- increase in income, consumer expectations, personal tastes and preferences.

Answer 24

The quantity of a commodity that consumers are willing and able to buy at a particular price.
Effective Demand- This is backed by income.

Question 25

Supply

Answer 25

A quantity of a commodity that producers are willing and able to offer for sale at a particular price.