Production, costs and revenue

Question 1

economies of scale

Answer 1

as firms make more things the average cost of making one falls

Question 2

internal economies of scale

Answer 2

changes within a firm
examples
technical economies of scale-purchasing specialised equipment

purchasing economies of scale-negiotating discounts with suppliers,

managerial economies of scale- employing specialist manager to decrease managment cost

financial economies of scale-borrow at a lower interest

risk bearing economies of scale

marketing economies of scale

Question 3

external economies of scale

Answer 3

changes outside a firms for example,

local colleges offering qualifications wanted by big employers

improvements to road networks or local transport

Question 4

diseconomies of scale

Answer 4

average cost rises as output rises

Question 5

internal and external diseconomies of scale

Answer 5

internal
wastage and loss

managers cant control whats going on

communication difficult as firms grow

external
increase price of materials

Question 6

LRAC

Answer 6

long run run average cost curve. it is l shaped
average costs fall sharply as output rises

Question 7

Causes of LRAC

Answer 7

external economies of scale will shift the curve downwards

Question 8

returns to scale

Answer 8

the effect on output by increasing all inputs

Question 9

relationship between returns to scale, economies and diseconomies of scale

Answer 9

increase in return to scale contribute to economies of scale because more output being produced than input reducing costs

decreasing returns to scale contribute to diseconomies of scale less output is produced than input increasing costs

Question 10

MES

Answer 10

the minimum efficient scale of production is the lowest level of output at which minimum average cost is achieved. This is when LRAC reaches minimum value

Question 11

law of diminishing returns

Answer 11

when a variable factor of production increase while other factors stay fixed marginal returns will decrease

Question 12

marginal product

Answer 12

the additional output produced by adding one more unit of factor input

Question 13

point of dimishing returns

Answer 13

the point where marginal product begins to decrease as input increase

Question 14

firms needing normal profit to operate in the long run

Answer 14

if a firms total revenue(AR) is greater than its total variable cost(AVC) then the firm can still operate

if a firm has a total revenue(AR) less than Total variable cost(AVC) then the firm cant operate