L11 - Short Run Production and Costs

Question 1

What factors of Production are variable in the Short Run and Long Run?

Answer 1

SR:
Only one factor of production (Labour) is variable. All others are fixed

LR:
All factors of production are variable

Question 2

What is the underlying assumption for Firms?

Answer 2

Each firm’s objective to maximise profit

Question 3

How do you calculate profit?

Answer 3

Profit (π) = Total Revenue - Total Cost

Total revenue (TR): the amount of money a firm receives from sales
• Total cost (TC): the value the firm pays to produce

Question 4

How do you calculate Total Revenue?

Answer 4

Price x Quantity

Question 5

What are the two forms of Opportunity Cost to a firm?

Answer 5

EXPLICIT COST: Require a cash flow from the firm (When £1000 used to pay workers, that £1000 can’t be used elsewhere)

IMPLICIT COST: Does not require cash flow from the firm (Running business is costly could go spend time elsewhere)

Question 6

What is Accounting Profit?

Answer 6

total revenue – explicit costs

Question 7

What is Economic Profit?

Answer 7

total revenue – explicit costs – implicit costs

Question 8

What does the Production Function state?

Answer 8

States how total output changes with labour (L) and capital (K).

In the short run labour is variable and capital fixed. A short-term production
function states how total output changes with labour (L) for a given level of
capital (K)

Question 9

What is the Total Physical Product of Labour (TPPL)?

Answer 9

This is total output that is produced by the units of labour, for a given capital

Question 10

What is the Average Physical Product of Labour (APPL)?

Answer 10

This is the average output produced by the units of labour, for a given capital

APPL = TPPL/L

Question 11

What is the Marginal Physical Product of Labour (MPPL)?

Answer 11

This is the extra output of producing one more unit of labour, for a given capital

MPPL =
∆TPPL/∆L = TPPL+1 – TPPL

Question 12

What is the Law of Diminishing Marginal Returns?

Answer 12

When some factors are fixed in the short run, employing another unit of a
variable factor eventually results in smaller and smaller increases in output

Question 13

How do you plot the TPP,MPP ?

Answer 13

CHECK DIAGRAM

ALTHOUGH ITS AS SIMPLE AS PLOTTING POINTS FROM A TABLE

Question 14

How do you calculate total costs (TC)?

Answer 14

Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)

Question 15

What are Total Fixed Costs?

Answer 15

Fixed costs are not related to the amount of output produced.

• They are incurred even if nothing is produced
• They can change but not as a result of increasing output

These relate to “costs for tractors etc”

Question 16

What are Total Variable Costs?

Answer 16

Variable costs are related to the amount of output produced
• They are not incurred if nothing is produced
• They increase as more is produced

These relate to “costs of workers” in our previous example

Question 17

How do you calculate Average Total Cost?

Answer 17

(ATC) =
average variable cost (AVC) + average fixed cost (AFC)

Or TC/Q

Question 18

How do you calculate Marginal Costs?

Answer 18

This is the extra cost of producing one more unit of output

MC = ∆TC/∆Q

Question 19

What happens when there is a falling MC?

Answer 19

increasing returns

CHECK DIAGRAM

Question 20

What happens when there is a rising MC?

Answer 20

diminishing returns

CHECK DIAGRAM

Question 21

What happens when marginal cost is below average cost?

Answer 21

average cost is falling

CHECK DIAGRAM

Question 22

What happens when Marginal Cost is above average cost?

Answer 22

average cost is rising

CHECK DIAGRAM

Question 23

What is the dip of the ATC (LRAC) called?

Answer 23

The minimum efficient scale