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Basic Economics > Theory of of Production > Flashcards

Theory of of Production Flashcards

1
Q

What is production concerned with?

A

The nature of the conversion process, i.e., how inputs are converted into output

It involves the actual transformation of inputs into outputs or the creation of goods and services.

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2
Q

What does the production function show?

A

The relation between input changes and output changes

It also shows the maximum amount of output that can be obtained by the firm from a fixed quantity of resources.

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3
Q

What is the Law of Diminishing Returns (LDR)?

A

As more units of a variable input are added to fixed amounts of capital, the change in total output will first rise and then fall

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4
Q

What occurs when diminishing returns to labour happen?

A

Marginal product of labour starts to fall, meaning total output increases at a decreasing rate

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5
Q

What are the three stages of production?

A
  1. Stage of Increasing or Positive Returns
  2. Stage of Declining or Diminishing Returns
  3. Stage of Negative Returns
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6
Q

What characterizes Stage 1 of production?

A

Variable input is used with increasing output per unit, reaching a maximum at point B

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7
Q

In Stage 2 of production, what happens to output and physical products?

A

Output increases at a decreasing rate; average and marginal physical product both decline

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8
Q

What occurs in Stage 3 of production?

A

Too much variable input is used relative to fixed inputs, leading to a decline in output per unit of both fixed and variable inputs

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9
Q

In Stage 1, what is the relationship between average product (AP) and marginal product (MP)?

A

At this stage AP = MP

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10
Q

What is Total Product (TP)?

A

Measures the total productivity of variable inputs applied to a fixed input

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11
Q

Define Average Product (AP).

A

Measures output per worker employed or output per unit of capital

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12
Q

What is Marginal Physical Product of Labor (MPP)?

A

The change in output from increasing the number of workers used by one person or by adding one more machine to the production process

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13
Q

What is the Short-Run in production?

A

A time too short that can’t allow the firm to vary all its inputs; at least one factor of production is fixed

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14
Q

What are fixed inputs?

A

Inputs whose sizes do not vary with outputs, e.g., land, labor, capital, buildings

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15
Q

What are variable inputs?

A

Inputs that vary with outputs, e.g., raw materials, electricity, water

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16
Q

What is the Long-Run in production?

A

A time period long enough that allows the firm to vary all inputs used in the production process

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17
Q

What does the long-run allow a firm to do?

A

Choose those quantities of all factors of production that seem most suitable, including the option for a new factory

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18
Q

What is the expression for the production function?

A

X = f(a, b, c,…nth)

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19
Q

What influences the behavior of Average Product (AP)?

A
  1. Economies of sizes and scales
  2. Division of labor
  3. Specialization of labor
  4. Technology
20
Q

What causes decreasing average product?

A

Diseconomies of sizes and scales, such as management failure in delegating authorities

21
Q

Fill in the blank: The three measures of production and productivity are Total Product, Average Product, and _______.

A

Marginal Physical Product

22
Q

True or False: In Stage 2 of production, the average product starts to diminish.

A

True

23
Q

In Stage 3 of production, what happens to the output per unit?

A

It continues to decrease but always remains above zero

24
Q

What is meant by ‘Short Run coverage’ in economic terms?

A

Short Run coverage refers to the period during which a firm can only adjust production levels but cannot change fixed factors of production.

25
Q

True or False: In the short run, all factors of production are variable.

A

False

26
Q

Fill in the blank: In the short run, firms can adjust _______ but not _______.

A

output; fixed costs

27
Q

What is the primary characteristic of short run production?

A

The ability to change variable inputs while fixed inputs remain constant.

28
Q

Multiple Choice: Which of the following is a fixed factor of production in the short run?

A

Factory size

29
Q

What happens to marginal cost as production increases in the short run?

A

Marginal cost typically increases due to diminishing returns.

30
Q

True or False: Short run decisions can be reversed.

A

False

31
Q

What does the term ‘diminishing returns’ refer to in short run production?

A

The decrease in the incremental output produced as additional units of a variable input are added.

32
Q

Fill in the blank: In the short run, a firm will continue to produce as long as the price is greater than ______.

A

average variable cost

33
Q

What is the relationship between total cost and total revenue in the short run?

A

Firms will continue production as long as total revenue covers total costs.

34
Q

Multiple Choice: Which of the following is NOT a short run decision?

A

Changing the size of the factory

35
Q

What is a key limitation of short run analysis?

A

It does not account for long-term adjustments and changes in fixed inputs.

36
Q

True or False: In the short run, firms can experience economic profits.

A

True

37
Q

What is the significance of the break-even point in short run analysis?

A

It indicates the level of production at which total revenue equals total costs.

38
Q

Fill in the blank: Short run production is influenced by the law of ______.

A

diminishing returns

39
Q

What is the short run supply curve for a firm?

A

The portion of the marginal cost curve that lies above the average variable cost.

40
Q

Multiple Choice: Which of the following best describes a firm’s short run supply decision?

A

Based on marginal cost and market price.

41
Q

True or False: All firms have the same short run production capabilities.

A

False

42
Q

What do firms aim to achieve in the short run?

A

Maximizing profits or minimizing losses.

43
Q

Fill in the blank: Short run analysis is primarily concerned with ______ decisions.

A

operational

44
Q

What role does demand play in short run production?

A

Demand influences pricing, which affects production levels.

45
Q

Multiple Choice: Which of the following is a result of increasing production in the short run?

A

Increased marginal cost

46
Q

What is the short run production function?

A

A mathematical representation of the relationship between inputs and outputs in the short run.

47
Q

True or False: In the short run, a company can adjust its labor force.

A

True

Basic Economics (4 decks)

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