Microeconomics, part 2- Production, Cost and Revenue

Question 1

Law of diminishing marginal returns definition:

Answer 1

A short term law which states that as a variable factor of production is added to a fixed factor of production, eventually both the marginal and average returns to the variable factor will begin to fall.
Total output is still increasing but at a diminished rate

Question 2

In the cost curve envelope, which law affects the SRAC curves?

Answer 2

Law of diminishing marginal returns

Question 3

In the cost curve envelope, which law affects the LRAC curve?

Answer 3

Economies of scale

Question 4

Why do short run average costs begin to rise?

Answer 4

The law of diminishing marginal returns

Question 5

Why do long run costs begin to rise?

Answer 5

Diseconomies of scale

Question 6

Increasing returns to scale definition:

Answer 6

Where an increase in factor inputs leads to a more than proportional increase in factor outputs

Question 7

Constant returns to scale definition:

Answer 7

When an increase in factor inputs leads to a proportionate increase in factor outputs

Question 8

Decreasing returns to scale definition:

Answer 8

When an increase in factor inputs leads to a less than proportionate increase in factor outputs

Question 9

Minimum efficient scale (MES) definition:

Answer 9

The first/lowest point of output at which productive efficiency occurs

Question 10

Technological change definition:

Answer 10

A term that is used to describe the overall effect of invention, innovation and the diffusion and spread of technology in the economy.

Question 11

Invention definition:

Answer 11

Making something completely new; something that did not exist before at all

Question 12

Innovation definition:

Answer 12

Improves and or makes a significant contribution to something that has already been invented, thereby turning the results of invention into a product

Question 13

What are the effects of technological change on methods of production?

Answer 13

• Move from labour intensive to capital intensive
• Increase in mechanisation and automation
• Requires more resources
• Requires investment
• Less labour but more skilled labour
• Specialisation

Question 14

What are the effects of technological change on the costs of production?

Answer 14

• Lowers cost curve envelope (LRAC), because of external economies of scale
• Shift along the LRAC curve because of internal economies of scale
• Fixed costs will rise but average fixed costs will eventually fall

Question 15

What can technological change do?

Answer 15

• Lead to the development of new products
• Lead to the development of new markets
• May destroy existing markets

Question 16

Creative destruction definition:

Answer 16

Capitalism evolving and renewing itself over time through technologies and innovations replacing older technologies and innovations

Question 17

Why can technological change lead to more concentrated markets?

Answer 17

The start up costs are so high and require large amounts of investment so only large companies can do it

Question 18

Why can technological change lead to more competitive markets?

Answer 18

Sometimes barriers to entry can be lower. For example, the internet has lead to no need for a shop front

Question 19

What is the demand curve like for a perfectly competitive firm and what does it equal?

Answer 19

-Horizontal line

D=P=AR=MR

Question 20

What is the demand curve like for a monopoly and what does it equal?

Answer 20

• Downward slope

- D=P=AR

Question 21

Why is the marginal revenue falling for a monopoly?

Answer 21

For the average to be falling, the marginal must be below it

Question 22

What does the total revenue curve look like?

Answer 22

Curve that goes up and then down a bit (n)

Question 23

When does total revenue start to fall?

Answer 23

When the marginal revenue is below 0. A loss is being made

Question 24

When is revenue maximised?

Answer 24

When MR=0

Question 25

Normal profit definition:

Answer 25

The minimum profit a firm must make to stay in business , which is, however insufficient to attract new firms into the market

Question 26

Why do economists include opportunity cost when working out a firm’s normal profit?

Answer 26

Because it is a cost. If the opportunity costs were greater than the money made, a rational entrepreneur would leave the market. Therefore the revenue covers the physical costs of production as well as the opportunity costs

Question 27

Supernormal profit definition:

Answer 27

Profit over and above normal profit. Also known as above normal profit and abnormal profit.

Question 28

What’s the difference between returns to scale and economies of scale?

Answer 28

• Returns to scale describe how much output changes as input is increased
• Economies of scale describe how reductions in average cost occur as output is increased