Costs and theory of the firm

Question 1

fixed costs

Answer 1

do not vary with output; e.g. cost of a factory

Question 2

variable costs

Answer 2

vary with output; e.g electricity, raw materials

Question 3

total costs

Answer 3

fixed + variable costs

Question 4

marginal costs

Answer 4

cost of producing one extra unit

Question 5

sunk costs

Answer 5

costs that are non-recoverable; e.g. advertising, rent

Question 6

ATC

Answer 6

TC/Q

Question 7

AVC

Answer 7

VC/Q

Question 8

AFC

Answer 8

FC/Q

Question 9

diminishing marginal returns

Answer 9

occur in the short run, when capital is fixed. If a firm continues to employ extra workers, there will become a point where an extra worker will have a declining marginal product
(other words:) with a fixed capacity, eventually, employing an extra worker will lead to declining productivity

Question 10

total product

Answer 10

total output produced by workers

Question 11

marginal product

Answer 11

the output produced by an extra worker

Question 12

long run

Answer 12

all factors of production are variable

Question 13

economies of scale

Answer 13

occur when average costs fall with increasing output. Therefore, increasing production leads to increasing returns to scale and there is greater efficiency.

(ecos of scale is common in industries with high fixed costs)

Question 14

The reasons economies of scale occur (7)

Answer 14

• specialisation and division of labour
• bulk buying
• technical
• financial economies
• marketing
• risk bearing
• external economies of scale

Question 15

technical (economies of scale)

Answer 15

when a firm benefits from increased scale of production. For example, a large machine is inefficient for small-scale production; for higher rates of production, the firm gains a better rate of return

Question 16

financial economies of scale

Answer 16

a bigger firm will find it easier to get a loan and get a better rate of interest than small firms

Question 17

marketing and economies of scale

Answer 17

e.g: a national TV campaign is more efficient for a larger firm with national sales than it would be for a regional firm

Question 18

external economies of scale

Answer 18

occurs when firms benefit from the whole industry getting bigger; e.g. if the industry gets bigger all firms will benefit from better infrastructure, access to specialised labour and good supply networks

Question 19

risk bearing economies of scale

Answer 19

a larger firm can diversify and has greater resources to absorb an unexpected shock (recession)(gay porn)

Question 20

diseconomies of scale

Answer 20

occurs in the long run when averaged costs begin to rise with increased output

Question 21

causes of diseconomies of scale (3)

Answer 21

1) poor communication in a large firm w/ many workers
2) alienation. working in a highly specialised assembly line can be very boring, leading to demotivation
3) lack of control: when there are large numbers of workers it is easier to escape with not working very hard

Question 22

minimum efficient scale

Answer 22

the minimum point of output necessary to achieve the lowest A.C on the LRAC
if the MES was 10’000 cars a week and the total industry demand was 40’000, the optimal number of firms would be 4