Production, Costs & Revenue

Question 1

Short & Long Run

Answer 1

• Short Run: When at least 1 factor of production is fixed
• Long Run: When all factors are variable

Question 2

Marginal, Average & Total Revenue

Answer 2

• Total Revenue: Revenue received from the sale at given level of output, TR = P x Q
• Average Revenue: Average revenue per unit, or the price each unit is sold for. AR = TR / Qs
• Marginal Revenue: Revenue earned from sale of one additional unit, difference between TR at different levels of output

Question 3

Law of Diminishing Returns

Answer 3

Law of Diminishing Returns: Occurs in SR
- Variable factor could be increased in SR (e.g employ more labour)
- Over time, FOP become less productive, so the marginal return falls
- Causes total output to rise, but at slower rate.

• Assumes firms have fixed factor resources in SR & state of technology remains constant
• However, firms can cut costs & production can be flexible (e.g out sourcing)

Question 4

Returns to Scale

Increasing, Decreasing & Constant Returns to Scale

Answer 4

Returns to Scale: Refers to change in the output of a firm after an increase in factor inputs

• Increasing RTS: When the output increases disproportionately to the no. of inputs (e.g input = 2, output = 4)
• Decreasing RTS: Output is lower than inputs (e.g input = 2, output = 1), linked to diseconomies of scale, occurs when firm becomes less productive
• Constant RTS: When output increases by same amount input increases (e.g input = 2, output = 2)