The supply decision

Question 1

Fixed factor

Answer 1

An input that cannot be increased in supply within a given time period

Question 2

Variable factor

Answer 2

An input that can be increased in supply within a given time period

Question 3

short run

Answer 3

the period of time over which at least one factor is fixed

Question 4

long run

Answer 4

the period of time long enough for all factors to be varied

Question 5

law of diminishing (marginal) returns

Answer 5

when one or more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish

Question 6

Opportunity cost

Answer 6

Cost measured in terms of the best alternative forgone

Question 7

explicit costs

Answer 7

the payments to outside suppliers of inputs

Question 8

implicit costs

Answer 8

costs that do not involve a direct payment of money to a third party, but which nevertheless involve a sacrifice of some alternative

Question 9

Historic costs

Answer 9

the original amount the firm paid for factors it now owns

Question 10

fixed costs

Answer 10

total costs that do not vary with the amount of output produced

Question 11

variable costs

Answer 11

total costs that do vary with the amount of output produced

Question 12

total cost

Answer 12

the sum of total fixed costs and total variable costs: TC=TFC+TVC

Question 13

Average total cost

Answer 13

total cost (fixed plus variable) per unit of output: AC=TC/Q=AFC+AVC

Question 14

average fixed cost

Answer 14

total fixed cost per unit of output: AFC=TFC/Q

Question 15

average variable cost

Answer 15

total variable cost per unit of output: AVC=TVC/Q

Question 16

marginal cost

Answer 16

the cost of producing one more unit of output: MC=TC/Q

Question 17

production in the short run is…

Answer 17

subject to diminishing returns. As greater quantities of the variable factor(s) are used, so each additional unit of the variable factor will add less to output than previous units:i.e. output will rise less and less rapidly

Question 18

When measuring cost of production…

Answer 18

we should be careful to use the concept of opportunity cost. In the case of inputs not owned by the firm, the opportunity cost is simply the explicit cost of purchasing or hiring them. It is the price paid for them. In the case of inputs already owned by the firm, it is the implicit cost of what the factor could have earned for the firm in its best alternative use.

Question 19

As some factors are fixed in supply in the short run…

Answer 19

their total costs are fixed with respect and output. In the case of variable factors, their total cost increases as more output is produced and hence as more of them are used. Total cost can be divided into total fixed and total variable cost.

Question 20

Marginal cost is…

Answer 20

the cost of producing one more unit of output. It will probably fall at first but will start to rise as soon as diminishing returns set in

Question 21

Average cost, like total cost, can be divided into…

Answer 21

fixed and variable costs. Average fixed cost will decline as more output is produced. the reason is that the total fixed cost is being spread over. greater number of units of output. average variable cost will tend to decline ate first, but once the marginal cost has risen above it, it must then rise. the same applies to average cost.

Question 22

economies of scale

Answer 22

where increasing the scale of production leaves to lower cost per unit of output.

Question 23

specialisation and division of labour

Answer 23

where production is broken down into a number of simpler, more specialised tasks, thus allowing workers to acquire a high degree of efficiency

Question 24

indivisibilities

Answer 24

the impossibility of diving a factor into smaller units

Question 25

plant economies of scale

Answer 25

economies of scale that arise because of the large size of the factory

Question 26

rationalisation

Answer 26

the reorganisation of production(often a merger) sea s to cut out waste and duplication and generally to reduce costs

Question 27

overheads

Answer 27

costs arising from the general running of an organisation, and only indirectly related to the level of output

Question 28

economies of scope

Answer 28

where increasing the range of products produced by a firm reduces the cost of producing each one

Question 29

diseconomies of scale

Answer 29

Where cost per unit of output increase as the scale of production increases

Question 30

external economies of scale

Answer 30

where a firms costs per unit of output decrease as the size of the whole industry grows

Question 31

Industry’s infrastructure

Answer 31

the network of supply agents, communications, skills, training facilities, distribution channels, specialized financial services, that support a particular industry

Question 32

Long-run average cost curve

Answer 32

A curve that shows how the average cost varies with I output on the assumption that all the factors of variable. (it is assumed that the least cost method of production will be chosen for each output)

Question 33

Envelope curve

Answer 33

A long-run average cost curve drawn as the tangency points of a series of short-run average cost curves

Question 34

Average revenue

Answer 34

Total Revenue per unit of output. When all output is solid at the same price, average revenue will be the same as price: AR=TR/Q=P

Question 35

price taker

Answer 35

a firm that is too small to be able to influence the market price

Question 36

price maker

Answer 36

Firms that can choose the price it’s chargers; it face is a downward-sloping demand curve. if however it alters it’s price this will affect the quantity sold: a full in price will lead to more being sold; at a higher price will lead to less

Question 37

Profit-maximising rule

Answer 37

Profit is maximized were marginal revenue equals marginal cost

Question 38

normal profit

Answer 38

the opportunity cost cost of being in business.it consist of the interest that could be earned honors class asset, plus a return for risk taken.it is counted as a cost of production

Question 39

Super normal profit (also known as pure profit, economic profit, abnormal profit common producer surplus or simplify profit)

Answer 39

the exes of total profit a bowl normal profit

Question 40

short-run shut-down point

Answer 40

where the AR curve is tangential to the AVC curve.the firm can only just cover its variable costs.any fall in revenue below this level will cause a profit maximizing firm to shut down immediately

Question 41

long-run shut-down point

Answer 41

Where the AR curve is tangential to the LRAC curve.the firm can just make a normal profits. any fall in revenue below this level will cause a profit maximizing firm to shut down once all costs have become variable

Question 42

Total profit equals

Answer 42

total revenue minus total cost

Question 43

Graphically, profits are

Answer 43

maximised at the output where marginal revenue equals marginal cost. How many phones is old, but, the level of maximum profit can be found by finding the average profit, and then multiplying it by the level of output.

Question 44

Normal profit is

Answer 44

The minimum profit that must be made to persuade a firm to stay in business in the long run. It is counted as part of the firms cost. Supernormal profit is any profit over and above normal profit.

Question 45

For the firm is that cannot make a profit at any level of output

Answer 45

The point where MR=MC represent the loss-minimising output

Question 46

In the short run, a firm will close down if it

Answer 46

Cannot cover its variable costs. In the long run, it will close down if it cannot make normal profit.

Question 47

Average cost or mark-up pricing

Answer 47

Where firms said the price by adding a profit mark-up to average cost

Question 48

Public limited company

Answer 48

A company owned by its shareholders. Shareholders liability is limited to the value of the shares. Cheers may be bought and sold publicly- on the stock market.

Question 49

Profits satisficing

Answer 49

Where decision-makers in a firm aim for a target level of profit rises in the absolute maximum level

Question 50

Sales revenue maximisation

Answer 50

An alternative theory, which assumes that managers aim to maximise the firms short-run in total revenue

Question 51

Principal-agent problem

Answer 51

Where are people (principles), as a result of lack of knowledge, cannot ensure that their best interests are served by agents

Question 52

asymmetric information

Answer 52

Where I wanna party in an economic relationship(An agent) has more information than another(the principal).

Question 53

Traditional theory assumes

Answer 53

Profit maximising behaviour by firms. Two major criticism of these are: firms may not have the information to maximise profits; they may not even want to maximise profits

Question 54

the complexity of the environment in which from operate may mean

Answer 54

that firms adopt simple “rules of thumb” such as applying a mark-up, over costs when determining prices

Question 55

In many companies, there is likely to be

Answer 55

Separation between ownership and control. It is the managers who make the decisions, and managers may look to maximise their own utility rather than that of the owners (shareholders). The problem of managers not pursuing the same goals as the owners is an example of the principal-agent problem.

Question 56

External diseconomies of scale

Answer 56

where a firm’s costs per unit of output increase as the size of the whole industry increases

Question 57

in the long-run the firm is able to

Answer 57

vary the quantity it uses of all factors of production, There are no fixed factors and hence no long-run fixed costs

Question 58

if it increases all factors by the same point, it may experience constant,

Answer 58

increasing or decreasing returns to scale

Question 59

Economies of scale occur when

Answer 59

costs per unit of output fall as the scale of production increases. This can be the result of a number of factors, some of which are directly due to increasing (physical) returns to scale. These include the benefits of special-isation and division of labour, the use of larger and more efficient machines, and the ability to have a more integrated system of production. Other economies of scale arise from the financial and administrative benefits of large-scale organisations.

Question 60

When constructing long-run cost curves it is assumed that

Answer 60

factor prices are given, that the state of technology is given and that firms will choose the least-cost method of production for each given output.

Question 61

The LRAC curve can be downward sloping, upward sloping or horizontal, depending in turn on whether

Answer 61

there are economies of scale, diseconomies of scale or neither. Typically LRAC curves are drawn as saucer-shaped (or as I-shaped). As output expands, initially there are economies of scale. When these are exhausted the curve will become flat. When the firm becomes very large it may begin to experience diseconomies of scale. If this happens, the LRA curve will begin to slope upwards again.

Question 62

An envelope curve can be drawn which shows

Answer 62

the relationship between short-run and long-run average cost curves. The LRAC curve envelops the short-run AC curves: it is ‘tangential’ to them (i.e. just touches them).

Question 63

Four distinct time periods can be

Answer 63

distinguished. In addition to the short- and long-run periods, we can also distinguish the very short- and very long-run periods. The very short run is when all factors are fixed. The very long run is where not only the quantity of factors but also their quality is variable (as a result of changing technology etc.).

Question 64

total revenue

Answer 64

a firm’s total earnings from a specified level of sales within a specified period:TR=P*Q

Question 65

total revenue(TR) is

Answer 65

is the total amount a firm earns from its sales in a given time period. It is simply price times quantity:
TR=P*Q.

Question 66

Average revenue (AR) is

Answer 66

is total revenue per unit: AR = TR/Q. In other words, AR =P.

Question 67

Marginal revenue is

Answer 67

is the extra revenue earned from the sale of one more unit per time period: MR = ATR/AQ.

Question 68

The AR curve will be the same as

Answer 68

the demand curve for the firm’s product. In the case of a price taker, the demand curve and hence the AR curve will be a horizontal straight line and will also be the same as the MR curve.

Question 69

A firm that faces a downward-sloping demand curve must obviously also face

Answer 69

the same downward-sloping AR curve. The MR curve will also slope downwards, but will be below the AR curve and steeper than it.

Question 70

When demand is price elastic, marginal revenue will be

Answer 70

positive. When demand is price inelastic, marginal revenue will be negative.

Question 71

A change in output is represented by

Answer 71

by a movement along the revenue curves. A change in any other determinant of revenue will shift the curves up or down.