Production In The Short Run & Long Run

Question 1

Fixed factors

Answer 1

Inputs whose quantity does not vary with output level

Question 2

Fixed cost

Answer 2

Cost of employing fixed factors that do not vary with output level

Question 3

Fixed factors + fixed cost examples ( 2 )

Answer 3

FF: the area rented, machines
FC: rent, wages employing full - time workers

Question 4

Variable factors

Answer 4

Inputs whose quantity varies with output level

Question 5

Variable cost

Answer 5

Costs of employing variable factors that vary with output level

Question 6

Short run

Answer 6

The production period in which both fixed and variable factors are employed in production

Question 7

Long run

Answer 7

The production period in which all factors employed in production are variable

Question 8

Law of diminishing marginal returns

Answer 8

The law states that in a short run, when variable factors are continuously** added to a certain amount of fixed factors, the marginal product of the variable factor will decrease eventually**, ceteris Paribus

Question 9

Economies of scale

Answer 9

Occurs in a firm when an increase in production scale will lead to a decrease in the average cost of production in the long run
% increase in output >. % increase in total cost

Question 10

Diseconomies of scale

Answer 10

Occurs in a firm when an increase in production scale will lead to an increase in average cost of production in the long run
% increase in output < % increase in total cost

Question 11

Optimal scale

Answer 11

When a long run average cost is at a minium

Question 12

Internal economies of scale

Answer 12

The expansion of a firm which lowers the average cost of production in the long run

Question 13

Internal economies of scale examples ( 4 TMFP )
- Technically, managers are not financially able to own a purse

Answer 13

Technical EOS: large firms can utilize MORE fully the machines and equipment, reducing AC.
Managerial EOS: large firms with a wider scope of specialization can raise efficiency, reducing AC
Financial EOS: large firms can obtain capital at a lower cost ( borrow $ at a lower interest rate )
Purchasing EOC: large firms can buy raw materials in bulk and obtain discounts in purchase, reducing AC

Question 14

External economies of scale

Answer 14

The expansion of the whole industry will lower the average cost of production in the long run

Question 15

External economies of scale examples ( 3 MTW)
- market sells transportation workers

Answer 15

1. Reduction of marketing and promotion cost
   -> region attracts more buyers for XX products/ services
2. Reduction of transportation cost
   -> transport network and other infrastructures would develop more quickly, improving accessibility
3. Reduction of average/ marginal cost of recruiting more experienced and skilled workers, as more of these workers would be attracted to the region

Question 16

Internal diseconomies of scale

Answer 16

The expansion of a firm which increases the average cost of production in the long run

Question 17

Internal diseconomies of scale examples ( 2 )

Answer 17

Managerial DEOC: The firm might have become too large in scale, so managerial efficiency starts declining
Financial DEOC: The firm may have large outstanding loans, the marginal cost of further** borrowing increases.

Question 18

External diseconomies of scale

Answer 18

The expansion of the whole industry will increase the average cost of production in the long run

Question 19

External diseconomies of scale example ( 1 )

Answer 19

Intense competition makes the market saturated, leading to a rise in the marketing cost