Costs

Question 1

How is profit measured?

Answer 1

Profit = Total Revenue - Total Costs

Question 2

What is technical efficiency?

Answer 2

Avoiding waste to produce a ‘given’ output level using minimum inputs

Question 3

What is the assumption about costs?

Answer 3

There are only 2 inputs/factors of production, capital and labour

Question 4

What is the difference between factors of production in the short term and long term?

Answer 4

Short - at least one factor is fixed so there are variable and fixed factors of production - production level depends on the intensity to which the fixed factor is used
Long - no factors are fixed, all variable - production is changed by varying all the factors in the most optimal way (least cost), long run REQUIRES INVESTMENT

Question 5

What is Total Product?

Answer 5

The total amount produced

Question 6

What is Marginal Product?

Answer 6

Change in total product as a result of one unit increase in a variable factor

Question 7

What is Average Production?

Answer 7

Total Product divided by quantity of input used

Question 8

What is the production function?

Answer 8

Technological relationship between inputs and outputs e.g. effect of introducing more labour to fixed capital (diminishes)

Question 9

What is the Law of Diminishing Returns?

Answer 9

As a firm uses more of a variable inputs, there comes a point where each additional unit of variable factor will produce less extra output than the previous unit = bell shape

Question 10

When does increasing marginal returns occur?

Answer 10

Initially each additional unit exceeds the previous; e.g. specialisations/division of labour

Question 11

What is the difference between products and costs?

Answer 11

Products relate to outputs

Costs relate to inputs

Question 12

What happens to costs in the short run?

Answer 12

Costs are increased as the firm can only increase the variable factor

Question 13

What is Total Cost?

Answer 13

Costs of all factors of production used by the firm

Question 14

What is Marginal Cost?

Answer 14

Change in total cost from one unit increase in output

Question 15

What is Average Cost?

Answer 15

The cost per unit of output

Question 16

What is the equation for average cost?

Answer 16

(TVC/Q) + (TFC/Q) Q=output

Question 17

What is the equation for marginal cost?

Answer 17

(change in TC)/(change in Q)

Question 18

What is the relationship between AC and AVP and MC of MP

Answer 18

They are inverse of each other

AVP not AP because fixed costs have a different shape

Question 19

Why is the Marginal Cost curve U-shaped?

Answer 19

Initially there are economies/increased returns but then decreases due to diminishing returns

Question 20

Why does AVC tend towards ATC?

Answer 20

Fixed costs are being spread over the increasing output

Question 21

Explain the AFC shape?

Answer 21

It starts high when there is a small output but the ‘divides’ between the increased output

Question 22

What is the main focus of long run costs?

Answer 22

Altering the size of capital stock to achieve the least cost means of production

Question 23

Why does LRAC follow the run of multiple SRATC?

Answer 23

Because there are no fixed costs, there are an infinite number of factory sizes for example

Question 24

Why is LRATC ‘U’-shaped?

Answer 24

Increasing returns to scale
constant returns to scale
decreasing returns to scale

Question 25

What is the difference between economies of scale and diseconomies of scale?

Answer 25

Economies of scale have falling long-run average costs as production increases (specialisation, bulk buying, better discount)
Diseconomies of scale have rising long-run average costs as production increase (complex management organisation structures)

Question 26

What are normal profits?

Answer 26

A payment to the entrepreneur sufficient to reward him for deploying his capital in the current form of production, included in average costs
(opportunity cost of providing the entrepreneurship factor of production)

Question 27

What are the 4 factors of production?

Answer 27

Entrepreneurship
Labour
Capital
Land

Question 28

What are abnormal profits?

Answer 28

Profits generated greater than normal profits