Production, costs and revenue

Question 1

How is short-run defined?

Answer 1

a period of time when at least one of the factors of production is fixed

Question 2

How is long-run defined?

Answer 2

a period of time when all factors of production are variable

Question 3

Define marginal returns of labour

Answer 3

the change in the quantity of total output resulting from the employment of one more worker holding all other factors of production fixed

Question 4

Define law of diminishing returns

Answer 4

a short term law which states that as a variable factor is added to fixed factors of production, marginal and average returns begin to fall

Question 5

Define productivity and labour productivity

Answer 5

1.Output per unit of input
2.Output per worker

Question 5

Why is the SRAC curve shaped like a dome ?

Answer 5

Because average costs fall due to productivity gains but they being increasing due to diminishing returns as a result of fixed factors of production

Question 5

Define returns to scale

Answer 5

rate by which output changes if the scale of all factors of production is changed.

ONLY LONG RUN

Question 6

What are the 3 possibilities with returns to scale ?
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What is the link between returns to scale and economies and diseceomies of scale ?

Answer 6

1.Increasing returns to scale - increase in scale of all factors of production increase output more than proportionate
2.Constant returns to scale
3.Decreasing returns to scale

(Returns to scale is the long run theory of production where as economies and iseconoies are long run theories for cost)

Increasing returns to scale lead to economies of scale where as dicreasing returns to scale result in diseconomies of scale.

Question 7

Define economies and diseconomies of scale
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what is the minimum efficient scale concept ?

Answer 7

1. as output increases long run average costs fall
2. as output increase long run average costs rise

It is the lowest output at which the firm is able to produce at the lowest LRAC

Question 8

Why is the LRAC shaped like U ?

Answer 8

Because LRAC fall due to economies of scale and rise due to diseconomies of scale

Question 9

How do you find the optimum firm size ?

Answer 9

It is the size of firm at the lowest point on the firms LRAC

Question 9

What are 6 reasons of economies of scale ?

Answer 9

1.technical economies: invest in specialist technology
2.Managerial -specialisation of workforce: increased productivity
3.marketing economies - bulk buyingand bulk marketing
5.financial economies - lower interest rates
6.risk-bearing economies - big firms are considered less risky

Question 10

What are 3 reasons for diseconomies of scale ?

Answer 10

1. managerial problems
   2.communication failure
   3.Motivation loss as firms grow - over specialisation

Question 10

What is the difference between internal and external economies of scale ?

Answer 10

Internal: cost saving resulting from the growth of the firm itself

External: cost saving resulting from the growth of the market e.g free training

Question 11

Define variable and fixed costs

Answer 11

1. Costs that change with output e.g wage
   2.Costs that do not change with output e.g salary and in LR they all become variable

Question 12

How do you calculate ATC ?

Answer 12

AVC+AFC

Question 13

What is the relationship between the MC and the marginal returns ?

Answer 13

They are a reflection of each other. Where the lowest costs occur when MC = AC and when they decline costs rise. LOOK AT CURVES PG 35

Question 14

What is the average revenue curve ?

Answer 14

It is the same as the demand curve

Question 15

When does maximum revenue occur ?

Answer 15

When marginal revenue is zero but then go up to the average revenue to see the actual value of revenue

Question 16

Where is the demand curve elastic, unitary and inelastic ?

Answer 16

At the top its elastic, middle unitary and bottom inelastic.
unitary when MR=0

Question 17

Define normal and abnormal profits ?

Answer 17

normal profit is essentially break even which allows firm to stay in business

abnormal profit is when both accounting and economic profit (opportunity costs - implicit costs) is positive

Question 18

Define specialisation

Answer 18

when an individual, firm or country produces a narrow range of goods and services and over time produces a comparative advantage in production.

Question 19

What are the benefits of specialisation ?

Answer 19

1.higher output: total production of goods and services is raised and quality can be improved

2.variety: consumers have access to greater variety of higher quality products

3.a bigger market: specialisation and global trade increase the size of the market offering opportunities for economies of scale

4.competition and lower prices: increased competition acts as an incentive to minimise costs, keep prices down and therefore maintains low inflation

Question 20

Define division of labour

Answer 20

where production is broken down into many separate tasks

Question 21

What are the drawbacks of division of labour ?

Answer 21

1.unrewarding: repetitive work that requires little skill lowers motivation and hits productivity

2.mass produced standardised goods lack variety for consumers

3.many people may choose to move to less boring creating a problem of high worker turnover

4.some workers may receive little training and may not be able to find alternative jobs if they find themselves out of work - they may then suffer from structural unemployment

Question 22

What curves are involved in displaying, normal, supernormal profit and economic loss ?

Answer 22

the AR and AC curves, in context of all the other curves

Question 23

When does normal and supernormal profits occur and economic loss ?

Answer 23

Normal: AC = AR
Super: AC < AR
Economic loss: AC > AR

Question 24

When does profit maximisation occur ?

Answer 24

when MC = MR but you have to move up to the AR curve to get the price level

Question 25

Define shut down price

Answer 25

it is the minimum price a firm can sell with to stay in business. As long as the price is = or > AVC.

Question 26

What is the mathematical relationship between MR and AR ?

Answer 26

The MR is twice the AR and the demand curve is unitary when MR=0

The AR is the demand curve because it is the price of a good and the demand curve shows the relationship between price and output.

Question 27

What are the roles of profit in market economy ?

Answer 27

1. The creation of enterprise incentive
2. The creation of worker incentives - pay related and bonuses
   3.Creation of shareholder incentives - more people buy shares can raise finance better
3. Better resource allocation - firms allocative resources to where there is profit
   5.Econmic efficiency - dynamic
4. Reward for innovation

Question 28

What is the difference between invention and innovation ?

Answer 28

Invention: creating something new

Innovation: develops an existing product

Question 29

How does technological change affects methods of production, productivity, efficiency and firms costs of production ?

Answer 29

1. Methods of production: Mechanisation ( when humans run machinery ) - Electrification - computerisation - Digitalisation and now AI

2.Productivity - generally increases e.g labour productivity

3.Efficiency - increases productive and dynamic efficiencies

4.Costs of production - reduction