M6/7

Question 1

What is the theory of production?

Answer 1

The combination of factor inputs to create an output in the form of good or services

Question 2

What is th short run?

Answer 2

Phase in production during which an increase in output is made by employing more of a variable factor but holding at least one factor fixed

Question 3

What is the law of diminishing returns?

Answer 3

Example: output increase by 5 then by 4 and 4 etc .. its increasing at a diminishing rate

Question 4

What is the long run?

Answer 4

Phase in production where an increase in output in created by employing more of all inputs , all factors vary.

Question 5

What are the 3 possible scenarios of the long run?

Answer 5

1. Increasing returns to scale : inputs < output
   Occurs when % increase in input is smaller than the % increase in output
2. Decreasing returns to scale : inputs > output
   “”
3. Constant returns to scale : inputs = output
   Equal

Question 6

What are private/internal costs?

Answer 6

Variable and fixed costs

Question 7

What are external costs?

Answer 7

Costs which spill over onto society as a result of production

Question 8

Calculating TC , FC , VC

Answer 8

TC = FC + VC
FC = TC-VC
VC = TC -FC

Question 9

Calculating ATC/AC , AFC , AVC

Answer 9

TC/Q
FC/Q
VC/Q

Question 10

What is marginal cost?

Answer 10

The additional cost incurred when one more unit is produced

Question 11

How to calculate marginal cost

Answer 11

Change in total cost all over change in output