Costs

Question 1

What is the short run?

Answer 1

The short run is when at least one factor of production is fixed.
—> e.g. cannot be changed

Question 2

What is the long run?

Answer 2

All factors of production are variable

Question 3

Are the factors of production variable or fixed?

Answer 3

• labour is a variable factor of production
• land and capital are usually fixed factors

Question 4

What does the law of diminishing returns state?

Answer 4

• returns to scale is how the output of a business responds to a change in factor inputs
  States that in the short run, when variable factors of production are added to a stock of fixed factors of production total/marginal product will initially rise and then falls

Question 5

When does increasing returns to scale occur?

Answer 5

When the % change in the output is bigger than the % change in inputs

Question 6

When does decreasing returns to scale occur?

Answer 6

When the % change in outputs is smaller than the % change in inputs

Question 7

When do constant returns to scale occur?

Answer 7

When the % change in output is equal to the % change in inputs

Question 8

What does the nature of returns to scale affect?

Answer 8

The shape of a businesses average cost curve - when their are sizeable increasing returns to scale and then we expect to see economies of scale from long run expansion

Question 9

How can you find an optimal mix between labour and capital?

Answer 9

• in the long run, firms will be looking for output that combines labour and capital in a way that maximises productivity and reduces unit cost to lowest level - this may involve a process of capital labour substitution, where capital machinery and new tech replaces some of the labour input
• a rise of capital intensity of production in many industries (e.g. farming, banking, etc)
• robotic tech is used extensively in many manufacturing/assembly industries (e.g. cars)
• however, robots can’t always replace labour.

Question 10

What is the minimum efficient scale?

Answer 10

Lowest level of output at which the firm is productivity efficient

Question 11

How do cost curves vary?

Answer 11

TFC - costs do not vary
TVC - influenced by diminishing returns, when the curve flattens, when they don’t need to employ as many workers, meaning reduced costs, yet output still increases, due to an increase in productivity - and team are working efficiently before reaching full capacity of fixed variables. As curve goes up, fixed variables are at full capacity (or nearly at) so workers added are less efficient - yet costs increase.

Question 12

How can factor prices and productivity affect the firms costs of production and their choice of factor inputs?

Answer 12

If factor inputs become more productive, firms can produce more output with a smaller input - this results in lower unit cost of production
- as the average cost per unit of 1 factor input rises, such as labour, firms are likely to switch to cheaper (and more productive) factor inputs, such as capital
- if productivity increases, the total costs of a firm fall - as their are higher output for the same input, reducing the per-unit costs and maximising capacity utilisation —> therefore higher economic growth
- however, if employers are more productive, the firm may be expected to increase workers wages