Paper 1 4. Production costs and revenues

Question 1

Automation:

Answer 1

Automatic control; the process by which machines control other machines

Question 2

Average cost:

Answer 2

Total production cost divided by total output (cost per unit of output).

Question 3

Average revenue:

Answer 3

Total revenue divided by total output (revenue per unit of output)

Question 4

Capital productivity:

Answer 4

Output per unit of capital.

Question 5

Constant returns to scale

Answer 5

When output increases by an equal proportion the increase in
inputs

Question 6

Decreasing returns to scale

Answer 6

When output increases by a smaller proportion than the
increase in inputs

Question 7

Diseconomies of scale:

Answer 7

When long-run average costs rise as output rises.

Question 8

Division of labour:

Answer 8

Different workers performing different tasks in a good’s/services’
production, specialising to an extent.

Question 9

Economies of scope:

Answer 9

When it is cheaper to make a range of products

Question 10

Economy of scale:

Answer 10

When long-run average costs fall as output rises.

Question 11

External economy of scale:

Answer 11

: Firms saving resulting from growth of the industry a firm is part
of.

Question 12

Fixed cost:

Answer 12

Costs of production that do not vary with output, only in the short run.

Question 13

Increasing returns to scale:

Answer 13

When output increases by a larger proportion than the
increase in inputs

Question 14

Internal economy of scale:

Answer 14

Firms saving resulting from growth of the firm itself

Question 15

Labour productivity:

Answer 15

Output per worker.

Question 16

Law of diminishing returns:

Answer 16

: By continually adding variable factors atop fixed factors,
eventually both average and marginal returns to the fixed factor fal

Question 17

Long run:

Answer 17

Time period in which none of the factors of production are fixed, and all can be
varied.

Question 18

Long-run average cost:

Answer 18

Long-run total cost per unit of output

Question 19

Long-run production:

Answer 19

When a firm changes the scale of all factors of production.

Question 20

Mechanisation:

Answer 20

When a firm transfers from becoming more labour intensive to becoming
more capital intensive

Question 21

Minimum efficient scale (MES):

Answer 21

The lowest level of output at which average costs are
minimised. Dependent on the market structure as well as barriers to entry

Question 22

Normal profit:

Answer 22

: Total revenue equals total costs; the minimum profit required to keep a firm
operating in an industry

Question 23

Operating costs:

Answer 23

Same as variable costs

Question 24

Overheads:

Answer 24

Same as fixed costs

Question 25

Production:

Answer 25

A set of processes that converts inputs into outputs.

Question 26

Productive efficiency:

Answer 26

Minimised average total cost.

Question 27

Productivity:

Answer 27

Output per unit of input.

Question 28

Profit:

Answer 28

Total revenue subtract total costs.

Question 29

Rate of return:

Answer 29

Income received from an investment

Question 30

Returns to scale:

Answer 30

The scale by which a firm’s output changes as the scale of all inputs are
altered

Question 31

Short run:

Answer 31

Time period in which at least one of the factors of production are fixed and cannot
be varied.

Question 32

Specialisation:

Answer 32

A worker only performing a specific task or a small range of tasks.

Question 33

Sunk cost:

Answer 33

Non-recoverable costs of entering a market

Question 34

Supernormal (abnormal) profit:

Answer 34

Any level of profit over and above normal profit

Question 35

Technical economy of scale:

Answer 35

Cost saving through changing the production process.

Question 36

Total cost:

Answer 36

Total fixed cost added to total variable cost.

Question 37

Total revenue:

Answer 37

Price of each good, multiplied by quantity sold.

Question 38

Variable cost:

Answer 38

Costs incurred when paying for the variable factors of production.

Question 39

X-inefficiency:

Answer 39

When a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary.