Costs of Production

Question 1

in what time periods can a firm operate?

Answer 1

short run or long run

Question 2

what is the long run?

Answer 2

a period of time during which all the factors of production are variable in quantity

Question 3

what is the short run?

Answer 3

a period of time during which at least one factor of production is fixed in supply

Question 4

what are explicit costs?

Answer 4

costs incurred by a firm when it pays an amount of money for something

e.g. when a firm pays its electricity bill

Question 5

what are implicit costs?

Answer 5

the do not involve the paying out of money but should still be considered in our analysis.

Question 6

what is the opportunity cost?

Answer 6

the cost of foregone alternatives.

Question 7

what are fixed costs?

Answer 7

costs that don’t change as output changes

Question 8

what are variable costs?

Answer 8

costs that vary as output changes.

Question 9

what is the total cost?

Answer 9

both fixed and variable cost added together.

Question 10

what is a company´s shut down point in the short run?

Answer 10

In the short run the company may make a loss.
The maxim for a companies in the short run is to cover their variable costs and contribute to the reduction of their fixed costs.

Question 11

The Law of Diminishing Marginal Returns.

Answer 11

As more and more of a variable factor is added to a fixed factor, at some stage the increase in output by the last unit of the variable factor will begin to decline.

Question 12

what is the Average Cost and how is it calculated?

Answer 12

the costs per unit…
calculated by dividing total costs by quantity

includes normal profit

Question 13

what is normal profit?

Answer 13

the return that sufficiently rewards the risk-taking of an entrepreneur and it must be earned to stay in business.

Question 14

what are the marginal costs?

Answer 14

the costs of producing an extra unit of a good. It is arrived at by calculating the change in total costs.

if MC is rising, we can say that the AC is rising too.

Question 15

why slopes the SAC curve first downwards?

Answer 15

specialization of labour,

greater spread of fixed costs

Question 16

why slopes the SAC curve upwards?

Answer 16

LOMR

Question 17

what shape has the SAC curve?

Answer 17

an U-Shape

Question 18

What are Economies of Scale ?

Answer 18

savings due size

- can be international and external

Question 19

what are internal economics of scale?

Answer 19

forces within a firm that cause the average/ unit cost of that firm to decline as it grows in size.

Question 20

examples of internal economies of scale:

Answer 20

increased use of machinery,
specialization/devision of labour,
construction savings,
purchasing economies,
financial economies,

Question 21

what are external economies of scale?

Answer 21

forces outside a firm that cause the average/ unit cost of that firm to decline as the industry grows in size

Question 22

examples of external economies of scale:

Answer 22

better infrastructure,
development of research,
trades,
availability of training curses,
support from public bodies,

Question 23

what are diseconomies of scale?

Answer 23

disadvantages due to size

- can be internal and external

Question 24

what are internat diseconomies of scale?

Answer 24

forces within a firm that cause the average/ unit cost of that firm to increase as it grows in size.

Question 25

examples of internal diseconomies of scale:

Answer 25

poor decision-making, fall in staff moral, communication problems, control problems,...

Question 26

what are external economies of scale?

Answer 26

forces outside a firm that cause the average/ unit cost of that firm to increase as the industry grows in size.

Question 27

examples of external economies of scale:

Answer 27

shortages of factors of production, raw material shortage, infrastructural problems,...

Question 28

what effect do returns to scale have to costs?

Answer 28

increasing = doubling inputs with outputs more than outputs, LRAC decreases decreasing= doubling inputs with output less than doubling , LRAC decreases constant= changing at exactly the same rate as factors , LRAC is horizontal

Question 29

why do small firms survive in the Irish market even though they don't benefit from economies of scale?

Answer 29

``` small size of the market, consumer loyalty, personal services, traditional markets, nature of the good, membership of voluntary groups ```

Question 30

what are the benefits of small-scale enterprises?

Answer 30

``` quick response time, decision-making, high output per person, fewer HR problems, lower overheads ```

Question 31

what are social costs?

Answer 31

a cost to society of an action or output cost/price that society has to pay for the existence of a particular product price that society has to pay as a result of the production/consumption of a community EXAMPLES: traffic congestion, air/water pollution, global warming,...

Question 32

what is a social benefit?

Answer 32

the benefit/advantage that accrues to society as a whole as a result of an individual firm consuming/producing a commodity that is not measured by the price system

Question 33

what is the private cost of a good/service?

Answer 33

the cost to the firm of making the good or providing the service

Question 34

define external diseconomies of consumption!

Answer 34

they occur when an action is taken by a consumer and this imposes a cost on third parties for which they are not compensated e.g. a drummer practices in a loud fashion and disturbes the neighbors

Question 35

define external diseconomies of production !

Answer 35

they occur when a producer carries out an activity and imposes a cost on third parties for which they are not compensated e.g. a manufacturing plant causing air or noise pollution

Question 36

define external economies of consumption !

Answer 36

they occur when a consumer undertakes an action and it benefits third parties for which the consumer is not compensated e.g. a person volunteers the management skills they learned at work to co-ordinate a local youth club

Question 37

define external economies of production !

Answer 37

happens when actions taken by producers result in benefits to third parties for which the producer is not compensated e.g. a company training staff who later leave and work for other firms

Question 38

define REVENUE !

Answer 38

revenue is the money received from sales, and as sales increase so does total revenue

Question 39

what is the AR?

Answer 39

average revenue. | calculated by dividing total revenue by quantity, also known as the price of a good. the ar curve is the demand curve

Question 40

what is MR ?

Answer 40

marginal revenue. | the change in total revenue when an extra unit of output is sold

Question 41

how are profits calculated?

Answer 41

a firm will make a profit if its total revenue exceeds its total cost (includes normal profit) i.e.the return that sufficiently rewards the risk taken by the entrepreneur/ the minimum that must be earned to stay in business

Question 42

at what point should a profit-maximising company produce?

Answer 42

MC = MR Mc cuts Mr from below, Mc is rising at a faster rate than Mr AR must be at least equal to AC

Question 43

difference between profit-maximising firms in the short and in the long run?

Answer 43

short run: AVC must be covered | long run: AC must be covered