Short-run and Long-run

Question 1

What is the short-run?

Answer 1

The period in which at least one input is fixed

Question 2

What is the long-run?

Answer 2

The period in which all inputs are variable

Question 3

What is a fixed input?

Answer 3

An input that cannot be changed in the short-run

Question 4

What is a variable input?

Answer 4

An input that can be varied within the specific period - output increases as more people are added

Question 5

What is the law of diminishing returns?

Answer 5

The extra output produced as more units of the variable factors that are added to fixed factors will eventually decrease

Question 6

What is total product?

Answer 6

The total output

Question 7

How do we calculate the average product?

Answer 7

Total product / No. of variable factors

Question 8

How do we calculate the marginal product?

Answer 8

Change in total product / change in variable factors (will eventually diminish)

Question 9

What does the short-run depend on?

Answer 9

The amount of inputs that are used and the prices that the firm must pay for them

Question 10

What are short-run total costs?

Answer 10

Made up of fixed costs and variable costs

Question 11

What are fixed costs?

Answer 11

Bit dependent on the level of output

Question 12

What are average costs?

Answer 12

Total cost / quantity produced

Question 13

What are marginal costs?

Answer 13

The extra cost of producing one more unit

Question 14

What are average fixed costs?

Answer 14

Fixed cost / quantity (always downward sloping)

Question 15

What are marginal fixed costs?

Answer 15

0. There are not extra fixed cost if one more unit is produced

Question 16

What are variable costs?

Answer 16

The cost of the variable inputs (usually labor)

Question 17

What are average variable costs?

Answer 17

Variable cost / quantity

Question 18

What are marginal variable costs?

Answer 18

Extra variable costs if one more unit is produced

Question 19

What are total costs?

Answer 19

Fixed cost + variable cost

Question 20

What are average total costs?

Answer 20

Total cost / quantity OR AC = AVC + AFC

Question 21

What are marginal total costs?

Answer 21

The extra total cost if one more unit is produced = MVC (as MFC = 0)

Question 22

How do we label our average and marginal cost graphs?

Answer 22

MC crosses AC and AVC at its minimum, and the vertical distance between AC and AVC is equal to AFC

Question 23

What are the effects of changing the scale of production?

Answer 23

Constant returns to scale, increasing returns to scale and decreasing returns to scale

Question 24

What happens when there are increasing returns to scale?

Answer 24

Average costs are falling (if we increase capital by 10% and production increases by more than 10%, this is falling AC)

Question 25

What happens when there are decreasing returns to scale?

Answer 25

Average costs are increasing

Question 26

What does internal mean?

Answer 26

Through changes inside the firm

Question 27

What does external mean?

Answer 27

Through changes outside the firm

Question 28

What different types of economies are there?

Answer 28

Technical, purchasing, managerial and financial

Question 29

What are the reasons for diseconomies of scale?

Answer 29

Motivation, communication and coordination and control

Question 30

What is the minimum efficient scale?

Answer 30

Lowest level of output at which the LRAC are minimised

Question 31

The shape of LRAC helps us to explain why there is what in some industries?

Answer 31

There are so many firms, there are large and small firms and there are very few firms

Question 32

Where does SRAC go on a graph?

Answer 32

SRAC is everywhere else above LRAC as the fixed input causes the firm not produce at the cheapest level