Theory of film

Question 1

The production function

Answer 1

• An attempt to predict the behaviour of the rational producer (firm)
• Seeks to answer:
  > How much will be produced
  > What combination of inputs will be used
  > How much profit will be made
• We will be using the theory of profit maximisation

Question 2

Short run theory of production

Answer 2

In the short run we have both fixed and variable factor inputs
- Fixed inputs
> Factors that cannot be changed in a given tie period (the short run)
- Variable inputs
> Those that can
- The short run is therefore a time period where at least one factor input is fixed
- Output can only be increased by using more variable factors
- Imagine:
> The fixed factor of production is capital and you are adding workers
> E.g. production line

Question 3

Cost of production

Answer 3

Firms costs will depend on the factors it uses and the markets for these factors.
This relationship will depend on:
- Productivity
> The greater productivity the less will be required to produce a given level of output
- Price of factors
> The higher the price the higher the cost of production

Question 4

Fixed costs

Answer 4

• In the short run because at least one factor of production is fixed, output can be increased only by adding more variable factors
• Hence we make a distinction between fixed and variable costs
• These do not vary directly with the level of output e.g. they are treated as independent of production
• Example of fixed costs include
  > The rental cost of a building
  > The cost of full time contracted salaried staff
  > The costs of meeting interest payments on loans
  > The depreciation of fixed capital
  > The cost of business insurance
  > The costs of leasing or purchasing capital equipment

Question 5

Variable costs

Answer 5

• Variable costs are business costs that vary directly with output
• Examples of variable costs include
  > The costs of intermediate raw materials and other components
  > The wages of part time staff or employees paid by the hour
  > The cost of electricity and gas used in production
  > The depreciation of capital inputs due to wear and tear
• Total variable cost rises and output increase
  Average variable cost (AVC) = total variable costs (TVC) ÷ output (Q)

Question 6

Marginal cost (MC)

Answer 6

• MC is the change in total costs from increasing output by one extra unit
• The marginal cost of an extra unit of labour is linked with the marginal productivity of labour
  > If marginal product is falling, assuming the cost of employing extra units of labour is constant the extra costs of these units of output will rise
  > There is an inverse relationship between marginal product and marginal cost
  Marginal cost = change in cost ÷ change in quantity