Production, Costs and Revenues

Question 1

Average cost calculation

Answer 1

• the cost per unit
• total cost/output

Question 2

Fixed costs definition

Answer 2

costs which do not vary as the level of production increases or decreases

Question 3

How is short-run defined?

Answer 3

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

Question 4

How is long-run defined?

Answer 4

a period of time when all factors of production are variable

Question 5

Total costs calculation

Answer 5

• sum of all costs of production
• fixed costs + variable costs

Question 6

Marginal revenue definition

Answer 6

additional revenue gained by a firm from selling an additional unit of output

Question 7

Define diminishing marginal returns to a fixed factor

Answer 7

• adding an additional factor of production results in smaller increases in output
• when one input in the production of a commodity is increased while all others are held fixed, eventually the additional input results in no extra product

Question 8

Define economies of scale

Answer 8

a proportionate saving in costs gained by an increased level of production

Question 9

Define diseconomies of scale

Answer 9

an economic disadvantage such as increase in costs arising from an increase in the size of an organisation

Question 10

Define specialisation and give the main benefit of specialised workers

Answer 10

• a particular area in which a worker can become an expert in
• increased productivity

Question 11

What are the four functions of profit?

Answer 11

• finance for investment
• market entry
• demand for factor resources
• signals about the health of the economy

Question 12

What is the law of diminishing marginal returns?

Answer 12

as successive units of a variable factor are applied to a fixed factor, the total output will increase but at a diminishing rate

Question 13

What is meant by the division of labour?

Answer 13

where production is broken down into many separate tasks

Question 14

Give 4 limitations of the division of labour

Answer 14

• unrewarding: repetitive work that requires little skill lowers motivation and hits productivity
• mass produced standardised goods lack variety for consumers
• many people may choose to move to less boring creating a problem of high worker turnover
• 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 15

What are the 4 gains for specialisation

Answer 15

• higher output: total production of goods and services is raised and quality can be improved
• variety: consumers have access to greater variety of higher quality products
• a bigger market: specialisation and global trade increase the size of the market offering opportunities for economies of scale
• competition and lower prices: increased competition acts as an incentive to minimise costs, keep prices down and therefore maintains low inflation

Question 16

What are the 6 different types of economies of scale?

Answer 16

• technical economies: invest in specialist technology
• specialisation of workforce: increased productivity
• marketing economies - spread fixed costs over sectors
• purchasing economies - bulk buy
• financial economies - lower interest rates
• risk-bearing economies