Topic 2 - Theory of Firm & Business Economics 1

Question 1

Short run Production

Answer 1

at least one factor of input is fixed.

Question 2

Long run production

Answer 2

all factors of production are variable

Question 3

Production process

Answer 3

when manufacteurers take an input item and turn it into an end good

Question 4

Capital goods

Answer 4

• goods that are used to make customer goods and services.
• capital inputs inculuded fixed plant and machinary, hardware, software, new factories and other buildings.

Question 5

Consumer goods and services

Answer 5

• goods and services which satisfy our needs and wants directly

Question 6

Subdivisions of consumer goods and services

Answer 6

consumer durables - provide a steady flow of satisfaction overt their working life. E.g. washing machine.
Consumer non-durables: products that are used up in the act of consumption e.g. drinking a coffee.
Consumer services: e.g. a haircut

Question 7

Production definition

Answer 7

is a measure of the value of output of goods and services. e.g. measured by national GDP or an index of production in specific industry such as car manufacturing.

Question 8

Productivity definition

Answer 8

a measure of the efficiency of factors of production measure by output per person employed, or by output per person hour.

Question 9

Factors affecting labour productivity

Answer 9

• The degree of competition in a market will reduce the production growth of firms because competition can constrain buyers and sellers to be price-taken.
• Advances in production technology will increase productivity since improved tech can create lower costs of productions for firms. The quality and quantity of goods will also improve. E.g AI
• Specialisation (Division of labour) within a business - the more they focus on wone task, the more efficient they become at that one task which means less time and money is involved in producing a good. e.g. factories producing cakes.
• Higher business investment in new capital outputs - when a business channel funds into capital, it creates the building blocks for a higher level of productivity in the future. e.g. land, buildings
• Investment in apprenticeship/ training to boost labour skills - workers are more skilled which means they can do more efficient job e.g. firms having training weeks.

Question 10

What does a production possibility frontier do/show

Answer 10

Maximum possible production of 2 goods/ services with given factors of production.
The various combinations of 2 goods/services that can be produced with given factors of production.

Question 11

What can manipulate a PPF diagram to show

Answer 11

Oppurtunity cost
Efficiency
Shifts of Production

Question 12

Labour productivity definition

Answer 12

the measure of how much output is produced per unit of labout input, for instance per worker. Higher productivity means a business is using all of their factors of production to full affect.

Question 13

How factors of production contribute to economic output

Answer 13

Labour - an increase means more products are produced increasing the output
Land - access to more means you can build more factories to increase the economic output.
Capital - increase means you can invest more in raw material
Entrepreneurship - by taking a risk in an investment you are open to profiting from the investment.

Question 14

Differences in factors of production between short term and long term

Answer 14

short term - one FoP is fixed.
long term - none of FoP are fixed.
long term uses FoP that can fluctuate and change.

Question 15

How does the law of diminishing return apply to a firms decision making in the short run

Answer 15

it influences a firms decision by determing the optimal level of input to maximise output and minimise costs.
The law of diminishing returns states that as more of one input is added while other inputs are help constant there will eventually be a point where each additional unit of input will yield less additional output.

Question 16

Division of labour

Answer 16

• when production is broken down in to separate task with workers doing specific tasks.
• the aim is to increase efficiency by allowing workers to focus on specific tasks.
• can raise output per person as people become proficient.
• lowers the supply cost per unit become people do there task faster.

Question 17

What is specialisation

Answer 17

• a result of division of labour
• when different firms/regions/countries become specialise in the production of a narrow/limited range of goods and services
• they will then develop a compatible advantage.

Question 18

Average product vs Marginal Product

Answer 18

Average product is the total product divided by the number of workers.
Marginal Product is the change in total product / change in change of workers.
When we employ our first few workers marginal product is rising becuase labour productivity increase for two reasons - specialisation and under uitilisation of fixed FoP. When we employ more than the peak Mariginal product we see a fall in Marginal Product because the fixed factors fo production constrain the productions.

Question 19

Increasing returns to scale

Answer 19

when the output increases by a larger proportion than the increase in inputs

Question 20

Constant return to scale

Answer 20

when the output change is of an equal proportion to the FoP.

Question 21

Decreasing returns to scale

Answer 21

when the output is less than the change in FoP.

Question 22

Fixed costs

Answer 22

expenses that remain constant regardless of the level of output

Question 23

Variable costs

Answer 23

change with the level of output

Question 24

Total costs formula

Answer 24

fixed + variable

Question 25

Average fixed costs

Answer 25

the fixed costs which remain the same divided by the quantity produced
AFP = Total costs/ Output

Question 26

Marginal costs

Answer 26

the change in cost from a business producing one extra unit of goods/services

Question 27

Short run costs

Answer 27

includes both fixed and variable, but some costs stay the same
6 - 12 months

Question 28

Long run costs

Answer 28

includes all costs including fixed and variable and all costs can be adjusted
Up to 5 years.

Question 29

Economies of scale definition

Answer 29

a reduction in long run average cost as output increases.

Question 30

Examples of internal economies of scale

Answer 30

Managerial - employing specialist managers
Technical - buying specialist machinery
Purchasing - buying raw material in bulk to negotiate discounts
marketing - bulk buying advertising
Financial - negotiate lower rates of interest when larger.
Risk bearing - when a business is larger they can spread the risks over a larger output, therefore lower average costs.

Question 31

examples of external economies of scale

Answer 31

better transport infrastructure - railways - makes it cheaper to access raw materials
component suppliers move closer - it is in their interest to cut transportation cost.
R&D firms move closer to you - you are a key business so you can use their R&D and improve your technology.

Question 32

Internal and external economies of scale definitions

Answer 32

Internal happen inside a business
external happen outside a business but in the industry

Question 33

Dis economies of scale definition

Answer 33

an increase in long run average costs as output increase

Question 34

Causes of dis economies of scale

Answer 34

loss of control - when the workforce becomes too large, managers will find too difficult to control all of the workforce and workers will see this and decide to slacken which causes their output to decrease.
communication - it will be much harder to send messages across a whole business therefore it is a waste of time and productivity costs rise.
Co-ordination - to make sure all poarts of teh business are working well together is difficult because you wont be able to always make sure they are working in the same way.
Motivation - each individual worker feels less valued so productivity is going to fall hence costs rise faster.

Question 35

Normal profit

Answer 35

is the minimum reward required to keep entrepreneurs supplying their enterprise.
This is when total revenue = total costs
Normal profit is considered a cost so it is put in the cost of production.

Question 36

Supernormal profit

Answer 36

aka abnormal profit or economic profit is the profit above normal.
This is when total revenue is greater than total costs.

Question 37

Total revenue

Answer 37

is the total amount of money received from the sale of any given output sold by the business
It is the total quanitity sold (Q) X the average price (P) received.

Question 38

Average revenue

Answer 38

show how much revenue there is per unit of output
= total revenue / output

Question 39

Why is the average revenue curve the demand curve

Answer 39

If demand is elastic and price increases, the quantity demanded will fall.
The effect on total revenue depends on how elastic the demand is.

Question 40

Marginal revenue definition and formula

Answer 40

refers to the increase in total revenue from increasing one output unit.

Change in revenue/ change in quantity