Theory of the Firm 1: Production and Costs - Week 4 / Chp 10/11

Question 1

What is the short-run cost?

Answer 1

• It is the period of time during which there is at least one factor of production fixed.
• This means a business faces a resource constraint. In the short run, at least one of the resources cannot be changed—for example, a firm cannot recruit the staff that it wants, cannot acquire new equipment, or cannot find new premises.
• This means that, in the short run, a firm cannot necessarily find its optimal mix of resources.
• As a result, there are fixed costs in the short run.

Question 2

What are short run total costs made up from?

Answer 2

fixed costs and variable costs.

Question 3

What fixed costs?

Answer 3

Fixed costs do not change with output.

Question 4

What are variable costs?

Answer 4

Variable costs do change with output.

Question 5

What are total costs?

Answer 5

Total costs equal fixed costs plus variable costs.

Question 6

What does the law of diminishing of returns state?

Answer 6

In the short run when variable factors of production are added to a stock of fixed factors of production total/marginal product will initially rise and then fall.

Question 7

What is the equation for marginal product?

Answer 7

change in total output/ change in the variable factor of production

Question 8

How to work out average product?

Answer 8

total product / quantity

Question 9

What is marginal product?

Answer 9

The marginal product is the extra output of an extra employee.

Question 10

What is average product?

Answer 10

The average product of labour is the output per employee (often called labour productivity).

Question 11

Equation for marginal cost?

Answer 11

Change in total cost / Change in output