Microeconomics, Part 3- Production, Costs and Revenue

Question 1

Division of labour definition:

Answer 1

Breaking down the production process down into a sequence of tasks, with workers assigned to particular tasks.

Question 2

Specialisation definition:

Answer 2

A worker only performing one task or a narrow range of tasks. Also different firms specialising in producing different goods or services.

Question 3

What does the division of labour and specialisation to do the PPF?

Answer 3

Increases it

Question 4

Labour productivity definition:

Answer 4

Measures the output per worker or per hour worked. Labour productivity = total output per time period / number of units of labour

Question 5

How can productivity be improved?

Answer 5

• Machinery
• Investment in capital
• Higher wages
• Training
• Education

Question 6

Fixed costs definition:

Answer 6

Cost which does not change WITH OUTPUT, in the short run (i.e. even if nothing is produced, it must still be paid. For example rent

Question 7

Variable costs definition:

Answer 7

Cost which changes proportionately with output

Question 8

Total cost definition:

Answer 8

Fixed costs + variable costs

Question 9

Average cost:

Answer 9

Total cost / output

Question 10

What does the graph for average cost look like?

Answer 10

U

The lowest point is productively efficient because it is working at lowest average cost

Question 11

Economies of scale definition:

Answer 11

As the scale of production of a firm increases, the long run average costs fall

Question 12

Long run definition:

Answer 12

All factors of production are variable (including premises)

Question 13

Short run definition:

Answer 13

At least one factor of production (usually land) remains fixed

Question 14

Internal economies of scale definition:

Answer 14

Cost savings that result from the growth of the firm itself

Question 15

Examples of internal economies of scale:

Answer 15

• Research and development
• Financial (Investors and banks are more likely to lend you money)
• Marketing
• Technical (Machines and factories)
• Managerial (more experienced and skilled workers)
• Purchasing (bulk buying)

Question 16

External economies of scale definition:

Answer 16

Cost saving resulting from the growth of the industry or market of which the firm is a part of

Question 17

Examples of external economies of scale:

Answer 17

• Research and development by the government
• Transport
• Infrastructure
• Improved education

Question 18

Diseconomies of scale definition:

Answer 18

Where an increase in the scale of production leads to increases in average total costs for firms

Question 19

What do diseconomies of scale arise from?

Answer 19

• Managerial diseconomies of scale (more difficult to manage)
• Communication failure
• Motivational diseconomies of scale (people aren’t as motivated because the firm has grown)

Question 20

Examples of external diseconomies of scale:

Answer 20

• Congestion

- Pollution

Question 21

What does the average cost graph for internal and external diseconomies of scale look like?

Answer 21

Average cost curve

• Economies of scale: Moves from the left hand side towards the right but not over half way (not past productive efficiency)
• Diseconomies of scale: On the right hand side

Question 22

What does the average cost curve for external economies and diseconomies of scale look like

Answer 22

The cost curve shifts up (diseconomies) or down (economies)

Question 23

What kind of firms have a downwards sloping cost curve?

Answer 23

Very large businesses. The fixed costs are so high that the variable costs are negligible and don’t have any effect on the average cost, so each additional unit sold decreases the average cost. It never reaches productive efficiency.