Production Costs and Revenues

Question 1

short run

Answer 1

at least one factor of production is fixed

Question 2

what factors of production are typically fixed and which are variable in the short run

Answer 2

capital and land are typically fixed
labour is typically variable

Question 3

law of diminishing returns

Answer 3

in the short run, when variable factors (usually labour) increase as a shock to the fixed factors (land and capital), it causes an initial rise and the fall in marginal output

Question 4

formula for marginal product

Answer 4

change in total product / change in quantity of labour

Question 5

formula for average product

Answer 5

total product / quantity of labour

Question 6

describe the graph of law of diminishing returns

Answer 6

average product as a n shaped curve with marginal product starting from same point but much steeper increase and quicker decrease, cutting through the AP’s peak, and going down all the way past the x axis. the peak of the MP shows where the law of diminishing marginal returns occurs. total product starts from 0 and slowing increases until the output where MP=0 where it starts to decline

Question 7

when is total product maximised

Answer 7

when marginal product = 0 (crosses the x axis)

Question 8

why does tp maximise when mp = 0

Answer 8

because as long as mp is positive, tp is increasing

Question 9

long run

Answer 9

when all factors of production are variable, made up of many short runs

Question 10

what are explicit costs

Answer 10

actual payments, fixed or variable

Question 11

examples of fixed costs

Answer 11

rent
salaries
interests on loans
advertising
business rates

Question 12

meaning of fixed costs

Answer 12

costs that are the same price no matter the output, if you produced nothing you would still pay

Question 13

examples of variable costs

Answer 13

wages
utility bills
raw material costs
transportation costs

Question 14

meaning of variable costs

Answer 14

have to pay more the more that you produce

Question 15

formula for total fixed costs

Answer 15

tfc = total cost - total variable costs

or

tfc = average fixed costs x quantity

Question 16

what does total fixed costs look like on a graph

Answer 16

straight vertical line

Question 17

formula for average fixed costs

Answer 17

afc = total fixed costs / quantity

or

afc = average costs - average variable costs

Question 18

what does average fixed costs look like on a graph

Answer 18

downwards slope

Question 19

what do total fixed costs and average fixed costs graphs have in common

Answer 19

no effect from diminishing returns

Question 20

average variable cost formula

Answer 20

avc = total variable cost / quantity

or

avc = average cost - average total cost

Question 21

what does the average variable cost curve look like

Answer 21

u shape

x axis; output
y axis; costs

Question 22

what does the lowest point of the average variable cost curve represent

Answer 22

lowest total / variable average cost (because fixed cost stays the same, and this is the point of lowest variable costs, and atc = avc = afc

Question 23

why is the average variable cost curve u shaped

Answer 23

law of diminishing returns

Question 24

why are average costs affected by diminshing returns

Answer 24

because marginal costs
(increasing total costs, which ac = tc/q) originally decrease because of;
specialisation
and underutilisation of fixed factors (e.g. land and capital)

Question 25

example of how specialisation and underutilisation of fixed factors lead to diminishing returns (pizza shop) in terms of product (MP and TP)

Answer 25

because originally they had 1 guy make every bit of the pizza, and to use all of the ovens and counter space then when MP is increasing is when everyone makes a different step of the pizza, and there are enough ovens and counter space for everyone, making it a lot more efficient then when MP is decreasing, there are too many people not enough steps or oven space or counter space- so the extra people are not as productive and when enough people are added and in the way of everything, MP becomes negative and TP starts decreasing

Question 26

quick summary of the two stages of diminishing returns in relation to production (in the short run)

Answer 26

1. labour productivity goes up with each extra worker due to specialisation and underutilisation of fixed factors 2. labour productivity decreases with each extra worker as the fixed factors of production constraint productivity

Question 27

how are average variable costs affected by diminishing returns

Answer 27

wages for all workers / amount produced = average variable cost (bc variable is affected by output, fixed is not) decreases due to decreased diminishing returns in productive due to constraint of the fixed factors of production (after specialisation and utilisation) workers are producing less on average as their marginal productivity decreases, therefore their wages become more costly to the firm (?)

Question 28

total costs graph shape

Answer 28

s shaped

Question 29

why is total costs graph s shaped

Answer 29

because it changes depending on variable costs (bc fixed costs r fixed) so its elasticity with costs and output is pretty uniform except for the range where output/productivity increases more than wage increases because there is still underutilisation of capital and specialisation to occur, before diminshing returns kicks in, leading to an s curve, where the - is where output increases > wage increases before marginal returns kicks in

Question 30

long run

Answer 30

when all factors of production are variable lots of little short runs made up together

Question 31

economies of scale in the long run / why is the long run graph u shaped

Answer 31

originally increasing returns to scale, then leads to constant returns to scale, and then decreasing returns to scale

Question 32

long run graph

Answer 32

u shaped curve, with costs on y axis and output on x axis with u labeled LRAC

Question 33

increasing returns to scale

Answer 33

%^ output > %^ input getting more output than input :) economies of scale

Question 34

decreasing returns to scale

Answer 34

%^ output < %^ input putting in more than output diseconomies of scale

Question 35

constant returns to scale

Answer 35

%^ output = %^ input

Question 36

long run graph for natural monopoly

Answer 36

no diseconomies of scale (or ridiculously large output gap for it) L shaped graph due to high fixed costs

Question 37

economies of scale

Answer 37

a reduction in long run average costs as output increases

Question 38

two types of economies of scale

Answer 38

internal and external

Question 39

internal economies of scale

Answer 39

within a businesses control can be exploited

Question 40

anatomy of internal economies of scale

Answer 40

really fun mums try making pies risk-bearing financial management technical marketing purchasing

Question 41

how does internal economies of scale usually work

Answer 41

increasing total costs with quantity increasing more

Question 42

technical

Answer 42

specialist machinery increased costs as they are expensive but will increase productivity and can replace labour or specialising labour increase costs of training but will increase productivity (increase quantity more) reducing unnecsary labour

Question 42

managerial

Answer 42

increasing total costs from employing specialists / managers but increasing quantity from increased productivity

Question 43

purchasing

Answer 43

when buying in bulk you can buy cheaper per unit so will be spending more, but selling more for the same cost of production / materials

Question 44

marketting

Answer 44

can bulk buy advertising so whislt buying more advertising (total costs rising) quantity is increasing by MORE

Question 45

financial

Answer 45

as a business grows they can negotiate lower rates of interest when they get loans from the bank (as the firm is reputable / proven success / lower risk) so average costs increase whilst quantity increases more

Question 46

risk bearing

Answer 46

spread their risk (opportunity cost) over a larger range of impact which lowers average cost

Question 47

external economies of scale

Answer 47

occur outside of the business cannot be manipulated by the business occurs without any action by the business besides growing in size

Question 48

examples of external economies of scale

Answer 48

better transport infrastructure competant suppliers move closer research and development firms move closer (it is profitable for them to be close to a big business, and profitable for the big business to be close to these firms - (average costs grow at a smaller rate than output)

Question 49

diseconomies of scale

Answer 49

increase in long run average costs as output increases

Question 50

how to remember the types of diseconomies of scale

Answer 50

3C's and an M

Question 51

3C's and an M

Answer 51

control communication coordination motivation

Question 52

control diseconomies of scale

Answer 52

as a firm grows in size, less control over individual workers as there are more workers leads to decreased productivity of the workers leading to average costs growing faster than output

Question 53

communication diseconomies of scale

Answer 53

as a firm gets bigger, communication from top to bottom and vice versa gets harder / longer e.g. low level workers ideas probably wont be heard by the ceo or anyone with any actual power decrease productivity (time spent of longer communication) which means average costs grow faster than output

Question 54

coordination diseconomies of scale

Answer 54

the bigger the firm, the more different types of workers that have to work alongside each other reduces productivity to help coordination = diseconomies of scale

Question 55

motivation diseconomies of scale

Answer 55

the bigger the firm the less motivated the workers less communication between the worers and the owners, not motivated to keep the firm that doesnt know them afloat decreases productivity = diseconomies of scale

Question 56

total revenue

Answer 56

tr = p x q

Question 57

average revenue

Answer 57

ar = (tr/q) = p

Question 58

marginal revnue

Answer 58

Δtr / Δq

Question 59

revenue in perfect competition

Answer 59

price takers + no barriers to entry/exit mr = ar = demand (price elasticity = 0)

Question 60

revenue in imperfect competition

Answer 60

price makers MR goes negative (twice as steep as AR) AR = D total revenue peaks at MR = 0 then goes negative

Question 61

profit

Answer 61

total revenue - total costs

Question 62

whats included in total costs

Answer 62

physical costs (fixed and variable) opportunity costs

Question 63

why do firms want profit maximalisation

Answer 63

re investment dividends for shareholders lower costs (and lower prices for consumers) rewards for risk taking entrepreneurship

Question 64

profit maximalisation

Answer 64

when MR = MC

Question 65

reasons that firms do not profit maximisation

Answer 65

do not know where mc = mr meet key stakeholders harmed if too much profit is made (consumers, workers, trade unions, government, environmental groups) other objectives more appropriate

Question 66

profit satisficing

Answer 66

sacrificing profit to satisfy as many key stakeholders as possible

Question 67

stakeholders in a firm

Answer 67

anyone who has an interest in how the firm is preforming shareholders manufacturing consumers workers trade unions government environmental groups

Question 68

revenue maximalisation

Answer 68

mr = 0

Question 69

reasons why firms might sacrifice profit maximalisation (for sales or revenue max)

Answer 69

increased output - better economies of scale, (decrease average costs per unit - potentially lowering costs for consumers) predatory pricing (undercutting competition to drive them out of the market) flood the market (increase output loads to make consumers aware of your product and grow brand loyalty so you can later profit/revenue maximise)

Question 70

objectives of firms that are not profit

Answer 70

revenue maximalisation sales maximalisation (ac = ar) survival public sector organisation (p = mc / allocative effiency to maximise society welfare) coorperate social responsibility (ethics prioritised over profit)