Short-Run Theory of Firm

Question 1

Criticism of regulators

Answer 1

Regulatory Capture - when regulators make decisions in favour of regulated industry and are less strict (e.g. due to knowing the owner of the business)

Question 2

What is a Fixed vs Variable input

Answer 2

• Fixed input can Not change in SR (Factor size [land])
• Variable inputs Can change in SR (Labour or Raw materials)

Question 3

What does TP mean?

Answer 3

• Total Product (Q)

Question 4

Average Productivity equation?

Answer 4

Average Productivity
- TP/V
- TP/L (Labour)

Question 5

Marginal Product equation?

Answer 5

Marginal Product
- △TP/△V
- △TP/△L (Labour)

Change in NOT %Change in
= New - Old

Question 6

What is the law of diminishing returns? + the condition

Answer 6

• As more units of a variable factor of production (e.g. Labour) are added to a fixed factor of production (e.g. land) there is a point which total production will continue to rise, but at a diminishing rate, (Marginal production will fall)
• Only occurs in SR

Question 7

What are the 3 stages of diminishing returns + their names?

Answer 7

1. MP (Marginal production) increasing and is positive so TP (Total Production) increases at increasing rate
   
   • Increasing Marginal returns
2. MP is decreasing and is positive so TP increases at decreasing rate
   
   • decreasing / diminishing marginal returns
3. MP is decreasing and is negative so TP decreases
   
   • negative marginal returns

Question 8

What are the 2 types of input costs?

Answer 8

• Fixed Costs (TFC)
• Variable Costs ( TVC)

Question 9

Fixed Costs (definition + examples + effect on buiness)

Answer 9

• associated with fixed inputs
  TFC (Total fixed Costs) = costs that don’t change with output level
• The higher the TFC the harder to start a business as output needs to be higher to achieve normal profits
• e.g. rent, insurance

Question 10

Variable Costs (definition, example)

Answer 10

• associated with variable inputs
  TVC (Total variable Costs) = costs that change with level of output
• e.g. cost of raw material, wages, energy costs, packaging

Question 11

Formula for TC (Total Cost)

Answer 11

• Total Costs (TC)
  TC= FC+VC
  (total costs = Fixed costs+ Variable costs)

Question 12

Formula for AC

Answer 12

• Average Cost
  TC/Q OR AFC+AVC
  Total cost / Quantity OR Average Fixed cost + Average Variable cost

Question 13

Formula for MC

Answer 13

• Marginal Cost
  △TC/ △Q

Change in NOT % Change in
–> New n. - Old n.

Question 14

What are Economic costs?

Answer 14

Explicit Costs + Implicit Costs
- Accounting costs + Opportunity costs

Question 15

What are Explicit and Implicit Costs

Answer 15

• Explicit Costs = Accounting costs (e.g. wages, cost of raw material
• Implicit cots (Opportunity cost)

Question 16

How does law of diminishing returns effect Supply curve
(hint - to increase production x only happens if x therefore x)

Answer 16

• To increase production, variable inputs need are added to a fixed factor of production
• After certain point, law of diminishing returns kicks in
• MC will increase (increasing Marginal costs)
• Producers produce more, only if they can charge higher price to cover higher MC
• Supply curve is upward sloping