lesson 3 - theory of the firms: costs

Question 1

what are fixed costs?

Answer 1

costs you need to pay even if nothing is produced

Question 2

what is variable costs?

Answer 2

costs that vary with the level of output

Question 3

how do you figure out total costs?

Answer 3

TC = VC + FC

Question 4

how do you figure out average costs?

Answer 4

AC = TC / output

Question 5

why does average variable costs eventually start rising?

Answer 5

there is a constraint on a factor of production so labour becomes less productively inefficient

Question 6

how do you figure out average total costs?

Answer 6

ATC = AFC + AVC

Question 7

what is the marginal cost?

Answer 7

the cost for producing one more unit

Question 8

how do you figure out marginal cost?

Answer 8

change in total costs / change in total output

Question 9

what is fixed in the short run?

Answer 9

capital

land

Question 10

what is variable in the short run?

Answer 10

labour

Question 11

what is the law of diminishing marginal returns?

Answer 11

in the short run when the variable factor is added to the fixed factor, initially marginal and average costs will fall but then will rise when the factors of production become crowded

Question 12

what is an output concept?

Answer 12

we produce more

Question 13

what happens when marginal > average?

Answer 13

average rises

Question 14

what happens when marginal < average?

Answer 14

average falls

Question 15

what are the three possibilities of the long run returns to scale?

Answer 15

increasing returns to scale

constant returns to scale

decreasing returns to scale

Question 16

why would we have increasing returns to scale?

Answer 16

falling costs

Question 17

why would we have constant returns to scale?

Answer 17

steady costs

Question 18

why would we have decreasing returns to scale?

Answer 18

rising costs

Question 19

what is technical economies of sale?

Answer 19

larger machinery

specialisation of capital goods

Question 20

what are examples of internal economies of scale?

Answer 20

technical

financial

marketing

Question 21

what is financial economies of sale?

Answer 21

cheaper to borrow

easier to sell shares

Question 21

what is marketing economies of sale?

Answer 21

bulk buying (purchasing power)

advertising costs

packaging and transport costs

Question 22

when do we have diseconomies of scale?

Answer 22

when there’s a lack of barriers

Question 23

examples of diseconomies of scale?

Answer 23

lack of control (hard to keep track)

communication

resource prices (high prices driven higher by demand)

co-ordination (firms can be slow to respond to management)

Question 24

in the long run what is returns to scale?

Answer 24

increasing returns to scale in the long run helps drive economies of scale

Question 25

what will lead to greater productivity in an industry?

Answer 25

an increase in capital investment