definitions L4

Question 1

variable factor of production

Answer 1

firms can use overtime to increase labour quickly

Question 2

law of diminishing returns

Answer 2

a law stating that if a firm increases its inputs of one factor of production while holding inputs of other factors of production fixed, eventually the firm will get diminishing marginal returns from the variable factor

Question 3

fixed factor of production

Answer 3

machinery or buildings can take a while to commission, so capital is fixed in the short run, but the variable in the long run

Question 4

sunk costs

Answer 4

costs incurred by a firm that cannot be recovered if the firm ceases trading

Question 5

minimum efficient scale

Answer 5

the level of output at which long-run average cost stops falling as output increases (lowest point on the AC curve)

Question 6

what shape does the marginal cost curve take

Answer 6

it decreases at first decreases with output and then will cross with the AC curve and start to climb.

Question 7

the MC curve will always cross at the lowest point of the average cost curve because…

Answer 7

when the MC curve is below the AC curve the cost of one more unit will be less than the average cost meaning the average will be reduced, as the MC curve increases the average will get lower and lower until the two lines cross which will be at the lowest point on the AC curve .

Question 8

what is an example of a sunk cost?

Answer 8

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