Topic 4.3 DMR/RTS and 4.4 Costs of Production

Question 1

Short-run costs of production

Answer 1

In the short-run, at least 1 factor of production cannot change. This means there are some fixed costs

Question 2

Long-run costs of production

Answer 2

In the long-run, any of the factors of production can change. This means that there all costs are variable

Question 3

Marginal return

Answer 3

The marginal return of a factor is the extra output derived per extra unit of factor employed

Question 4

Average return

Answer 4

The average return of a factor is the output per unit of input. This is the output per worker per period of time

Question 5

Total return

Answer 5

The total return of a factor is the total output produced by a number of units of factors

Question 6

The law of diminishing returns

Answer 6

the variable factor could be increased in the short-run (e.g. the firm employs more labour). Over time, the labour will become less productive due to the constraints of the fixed factor (e.g capital) so the marginal return of employing extra labour drops.

This is why the short-run costs curve is a U-shape

Question 7

Returns to scale

Answer 7

refers to a change in the output of a firm after an increase in factor inputs

Question 8

Increasing returns to scale

Answer 8

refers to when output increases by a greater proportion to the increase in inputs. Linked to economies of scale and a lower average cost/unit

Question 9

Decreasing returns to scale

Answer 9

refers to when output increases by a lesser proportion to the increase in inputs. Linked to diseconomies of scale and a higher average cost/unit

Question 10

Constant returns to scale

Answer 10

the increase in output is directly proportional to the increase in inputs

Question 11

Marginal Cost

Answer 11

The cost of producing one extra unit of output. According to the law of diminishing returns, after a point, marginal costs increase.

Question 12

Short-run average total cost

Answer 12

The SRAC curve is U-shaped due to the law of diminishing marginal returns

Question 13

Long-run average total cost

Answer 13

The LRAC curve is a symmetrical U-shape curve due to economies and diseconomies of scale. The bottom represents productive efficiency.

Question 14

Shifts in SRAC and LRAC

Answer 14

Both curves either shift up or down.
Efficiency and total costs are main factors therefore if costs of production increases, then curves may shift upwards.