Micro 4: Productivity, A Firm's Costs and the Supply Curve

Question 1

What is short run analysis?

Answer 1

We assume at least one factor of production is fixed, normally the capital.

Question 2

What is long run analysis?

Answer 2

Assumes that all factors of production can change. They can increase in quantity or quality.

Question 3

What does it mean if analysis is on the margin?

Answer 3

The person making decisions (the producer) assesses the impact of one more additional member of staff and decides what would be the optimal number of workers to employ.

Question 4

What is marginal physical product?

Answer 4

The increase in output of each new member of staff.

Question 5

How is output calculated?

Answer 5

Number of product/ day

Question 6

How is marginal product calculated?

Answer 6

Output of n workers - output of n-1 workers

Question 7

What are increasing (marginal) returns?

Answer 7

The phenomenon whereby increasing one variable input (usually labour) leads to increasing marginal product (and productivity) of that input. (eg. as more staff are employed, each new member of staff leads to an increase in productivity).

Question 8

What are diminishing (marginal) returns and how does it affect productivity?

Answer 8

The phenomenon whereby additional staff employed lead to a decline in marginal product of labour and a decline in the total product and marginal product (eg. as new members of staff are employed, each new member of staff causes a fall in productivity).

Question 9

What does productively efficient mean?

Answer 9

Where the quantity produced per unit input is maximised for a firm or where factor inputs required for each unit produced are minimised.

Question 10

What is total cost?

Answer 10

The total cost of production at any level of output. This is equal to variable costs + fixed costs.

Question 11

What are fixed costs?

Answer 11

Costs that do not vary as output increases in the short run. This includes payments on rent, salaries, interest on loans, advertising and marketing budget, buildings insurance and business rates

Question 12

What are variable costs?

Answer 12

Costs which do vary directly with increases in output increases. Depending upon which factors are variable, this may include the cost of raw materials, fuel for delivery vehicles, packaging and wages paid to labour.

Question 13

What are semi-fixed costs?

Answer 13

Costs which may vary with output but not directly, eg. energy.

Question 14

What is average cost?

Answer 14

The cost per unit produced. How much the firm has to pay in factor costs for each unit produced at different levels of output.
Formula: AC= TC/Q, where Q is the total output of the firm.

Question 15

What is marginal cost?

Answer 15

The additional cost incurred from making an additional unit of output
Formula: MC = TCn units - TCn-1

Question 16

What is average variable cost and average fixed cost?

Answer 16

Formulae:
AVC = TVC/Q,
AFC = TFC/Q

Question 17

What is total variable cost?

Answer 17

TC - TFC

Question 18

What is average total cost and marginal cost?

Answer 18

ATC = TC/Q
MC = change in TC/ change in Q

Question 19

Where is the most productively efficient level of output on the graph?

Answer 19

When the total average cost crosses marginal cost. Output per worker/ wage cost is maximised.

Question 20

What is supply?

Answer 20

The total quantity of a good or service that producers are willing and able to provide at a range of prices over a given period of time.

Question 21

What does a shift in the supply curve illustrate?

Answer 21

A change in the quantity supplied, which is a change in the amount of goods actually supplied by producers. This is perhaps the consequence of a change in the price level.

Question 22

Can changes in price directly affect the supply of a good?

Answer 22

No, they cannot directly cause a shift in supply. This is because the supply curve already illustrates what happens as prices rise and fall; that is the purpose of the curve.

Question 23

What are the factors that cause a shift to the supply curve?

Answer 23

Productivity. Higher productivity causes an outward shift in supply, because average costs for the firm fall.
Indirect tax. Inward shift in supply.
Number of firms. The more firms there are, the larger the supply.
Technology. More advanced technology causes an outward shift in supply.
Subsidies. Outward shift in supply.
Weather. Favourable conditions will increase supply, particularly for agricultural produce.
Costs of production. If they fall, the firm can afford to supply more. If they rise, like with higher wages, there will be an inward shift in supply.
Also, depreciation in the exchange rate increases the cost of imports, which will cause an inward shift in supply.

Question 24

How do you calculate total fixed costs?

Answer 24

TC - TVC

Question 25

How do you calculate average fixed costs?

Answer 25

TFC / Q
Or AC - AVC

Question 26

What are three factors that can explain the shape of the supply curve?

Answer 26

Diminishing marginal returns
Higher costs
Profit incentive

Question 27

When is total revenue maximised?

Answer 27

When marginal revenue is 0.

Question 28

When does marginal product cut average product?

Answer 28

At its highest point.

Question 29

Why are there increasing returns to labour with the first few workers?

Answer 29

Labour productivity rises because there’s specialisation and division of labour (workers taught by previous workers and tasks split for efficiency) and under-utilisation of fixed factors of production (eg. if 3 ovens we need 3 workers to get the full use out of them). Marginal product rises as there’s more output with each new worker.

Question 30

Why does marginal product fall after a certain number of workers?

Answer 30

MP and labour productivity falls because fixed factors of production become a constraint on production (not enough resources for all the workers, they get in each other’s way and affect output).

Question 31

When is total product maximised?

Answer 31

When marginal produc is 0 because there’s no more MP to bring in.

Question 32

What do total fixed costs look like on the graph?

Answer 32

Horizontal line because unchanging.

Question 33

What do average fixed costs look like on the graph?

Answer 33

Downwards sloping because TFC stay the same and quantity rises so it’s being divided by a bigger number each time so AFC falls.

Question 34

What is the relationship between law of diminishing returns with AFC, TFC and average variable costs?

Answer 34

Doesn’t affect AFC and TFC.
Affects AVC (curve goes down then up on graph)

Question 35

What’s the relationship between MP and AP and MC and AC?

Answer 35

They’re reflections of each other.
MP and AP- curve up then down bc more efficiency means more products at start
MC and AC- curve down then up bc more efficiency means less costs at start

Question 36

What is the shape of TVC and why?

Answer 36

Upwards sloping then goes right then upwards sloping again because output is increasing at faster rate than costs at first as there’s under-utilised capital and specialisation hasn’t taken place yet, then as we increase workers diminishing returns kicks in because of over-utilisation of capital and constraint on production so costs rise faster than output so curve becomes steep again.

Question 37

What is the shape of TC and why?

Answer 37

TC = TFC + TVC
TFC is constant so TC is TVC but higher. Starts at TFC because at that point TVC is 0.

Question 38

What is production?

Answer 38

The total output of goods and services produced by an individual, firm or a country.
It’s also the process of converting raw materials and factors of production into outputs.

Question 39

What is productivity?

Answer 39

The rate of production per factor of production input, so it’s how efficient an individual, firm or country is at generating output.

Question 40

What is the formula for productivity and labour productivity?

Answer 40

productivity= total output per time period/ number of factors of production input
labour productivity= total output per time period/ number of hours (units) of labour

Question 41

What is specialisation with examples at each level?

Answer 41

When an individual, firm, region or country is limited to only producing certain goods or services
Individual- tax accountant
Firm- PwC specialising in accountancy
Region- City of London specialising in investment banking
Country- UK specialising in provision of financial services

Question 42

What are the benefits of specialisation to a firm and to an economy?

Answer 42

-Maximising output as everyone produces what they’re most efficient at which also increases trade as countries export what they produce so export revenue rises so trade is mutually beneficial as they also import goods and services they don’t produce so there’s economic growth with more jobs and higher income
-Wider range of goods and services, eg. Dyson focuses on certain goods so they produce a wide range of hoovers, hairdryers etc.
-Greater allocative efficiency as resources go to those who are most efficient at producing so scarcity is reduced and resources are allocated efficiently so consumer demand is satisfied so basic economic problem is solved
-Greater productivity as workers are used to their maximum productive potential and lower costs of production for firms so lower prices
-Quality improvements
-Repetition of a limited range of activities can increase skill and aptitude so workers become experts in their fields, eg. neurosurgeons

Question 43

What are the disadvantages of specialisation?

Answer 43

-Finite resources so if a country overspecialises in oil the resource could be depleted
-Change in fashion or trends could mean it turning away from something a firm overspecialises in especially if they haven’t diversified
-De-industrialisation if foreign firms become more efficient than an industry abroad at producing a good or service so the less efficient firm deindustrialises so there’s more unemployment
-National interdependence as there needs to be mutually beneficial trade but if there are IR issues trade could be blocked off

Question 44

What is the division of labour with an example?

Answer 44

Specialisation at the level of the individual worker so the production process is broken down into separate tasks
Adam Smith pin factory

Question 45

What are the benefits of division of labour to a firm?

Answer 45

-Workers highly productive if they perform the same tasks repeatedly so they get higher wages and there are time savings and lower costs for firms so lower prices for consumers while output is maximised and profitability is high
-Specialist capital for workers drives up their productivity again so there are low prices, high consumer surplus
-Lower prices, higher choice/quantity for consumers, higher quantity
-People can work to their natural strengths, eg. physical strength, technology
-Reduced time spent moving between jobs or workstations so higher productivity
-Saves money on training costs

Question 46

What are the disadvantages of division of labour to a firm?

Answer 46

-Demotivation of workers from repeating the same tasks so productivity could decline over time so costs of production rise, diseconomies of scale and a decline in quality and there could be high worker turnover which is bad for firms looking for stable employment as workers leave
-Risk of long-term unemployment as, if they produce a narrow part, technology could advance so machines can do their jobs instead and workers are so skilled in a narrow field they don’t have the skills for other jobs so they’re long-term unemployed and living standards fall, structural unemployment
-Highly standardised goods and services so they lose their uniqueness, lack of variety as they’re mass-produced
-Increased costs for firms if there’s unemployment with recruitment and retraining costs

Question 47

How is marginal cost influenced by the law of diminishing returns?

Answer 47

Marginal cost of production initially declines then begins to rise because as units of factors of production like labour become increasingly less productive, the wage cost per unit of output will begin to rise.