Production

Question 1

What are the assumptions that economists make about production?

Answer 1

No buyer or seller in the market is big enough to influence the market price

Sellers in the market produce identical goods

There is free entry and exit in the market

Question 2

The goal of a seller is to maximise profits - what are three problems that they face?

Answer 2

1) how to make the product
2) what is the cost of making the product?
3) how much can the seller get for the product in the market?

Question 3

What is the production function?

Answer 3

Question 4

What are the two types of inputs?

Answer 4

Fixed Factors of Production: Inputs that cannot be changed in the short term and stay the same regardless of how much output is produced

Variable Factors of Production: Inputs that change with the amount of production

Question 5

What is the difference between the short-run and the long-run?

Answer 5

In the short run, some assets are fixed
- The timeframe of the short run is how long it take to get rid of your fixed inputs

In the long run we assume that there are no fixed assets

• All inputs are able to be changed in this period
• These will vary from firm to firm/industry to industry

Question 6

What is marginal productivity, and how can it be calculated?

Answer 6

The marginal product is the additional output that is generated from an additional unit of input

It can be calculated by dividing the change in quantity by the change in labour

Question 7

What is the law of diminishing marginal productivity?

Answer 7

As you increase the amount of variable inputs, without increasing the fixed inputs, output will increase, but at a decreasing rate

Question 8

What are the potential stages of marginal productivity?

Answer 8

Marginal product can increase with early workers, because it allows for:

• Specialisation (the efficient division of duties)
• Learning from other employees

However, at some point, each additional worker begins to contribute less output than the worker before
- This is because of the limitations of fixed inputs, which must be shared amongst more and more workers, decreasing their efficiency

At an extreme point, marginal product can be negative
- This is when the amount of workers becomes so inefficient as to start creating negative outcomes for the business

Question 9

What are the two types of costs of production?

Answer 9

Question 10

How do you calculate total cost?

Answer 10

Total Fixed Costs + Total Variable Costs

Businesses also have to consider the opportunity costs of being in the business

Question 11

Define production, explicit and implicit costs

Answer 11

Production costs = all explicit and implicit costs

Explicit costs = inputs that require a money outlay
- Include fixed and variable costs

Implicit costs = costs that don’t require a money outlay
- The opportunity cost of money and time

Question 12

What is the difference between economic and accounting profit?

Answer 12

Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs

Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs

Economic profit is smaller than accounting profit

Question 13

How do you graph total cost?

Answer 13

The total cost curve will take into account the constant fixed cost & the increasing variable cost

The total cost will run parallel to the variable cost, with the difference between the two lines being the fixed cost

Question 14

What are average costs, and how can you calculate them?

Answer 14

Average costs are found by dividing the firm’s costs by the quantity of output produced

Average Fixed Cost = total fixed cost divided by output

Average Variable Cost = total variable cost divided by output

Average Total Cost = total cost divided by output
- OR Fixed Cost/Output + Variable Cost/Output

Question 15

What is marginal cost?

Answer 15

The increase in total cost caused by an extra unit of production

Marginal Cost = change in total cost divided by change in output

Question 16

What is marginal cost?

Answer 16

The increase in total cost caused by an extra unit of production

Marginal Cost = change in total cost divided by change in output

Question 17

What is the shape of an average total cost curve in a typical cost curve?

Answer 17

Average Total Cost Curve is U-shaped

At low levels of output, we have high average fixed costs spread over a small number of units, but average variable costs are also small

As average fixed costs decrease, average total cost also decreases

This occurs until higher levels, when the increase in average variable cost becomes greater and a larger component of ATC, bringing average costs up

The Minimum Efficient Scale is the point on the ATC curve where average costs are at their lowest possible level

Question 18

What is the shape of the marginal cost curve?

Answer 18

The marginal cost curve is linked to the marginal productivity of the inputs

When marginal productivity is increasing, it means that a business is increasing their output at a faster rate than they are increasing their costs

Therefore the additional cost per unit must be falling

When the marginal productivity of labour is decreasing, it means that a business is increasing their output slower than they are increasing their costs

Therefore the additional cost per unit must be increasing

Question 19

Where does the marginal cost curve cut ATC & AVC?

Answer 19

When marginal cost is less than average cost, ATC is decreasing

When marginal cost is greater than average cost, ATC is increasing

MC is equal to ATC at the minimum of the ATC cost curve