Unit 2

Question 1

Labour productivity

Answer 1

Quantity of units produced by a worker in a given period of time

Question 2

Specialisation

Answer 2

When a country or firm only focuses on a limited quantity of goods but produces them to a high level of quality.

Question 3

Division of labour

Answer 3

Breaking up production so each worker only completes a small quantity of tasks.

Question 4

Short run

Answer 4

The time period in which a minimum of one factor of production is fixed.

Question 5

In the short run what do we look at…

Answer 5

Marginal product (or returns) of a variable factor of production and the productivity of a firm.

Question 6

Sunk costs

Answer 6

Costs that the firm has already paid and aren’t recoverable if the firm wishes to leave the industry. Eg. rent or money on new equipment.

Question 7

Long run

Answer 7

All factors of production are variable.

Question 8

In the long run we look at…

Answer 8

Returns to scale

Question 9

Marginal product

Answer 9

The change in output when adding a variable of FoP.

Question 10

Marginal returns of labour

Answer 10

The change in the quality of total output resulting from the employment of one more worker, holding all other variables constant.

Question 11

Law of diminishing returns

Answer 11

A short term law which states as a variable FoP is added to a fixed FoP, eventually both marginal and average returns to the variable factor will begin to fall.

Question 12

Total physical product

Answer 12

• The total output produced by a firm given the factor inputs. Eg. the amount of capital and labour over a period of time.
• Average physical product x Units of variable input

Question 13

Average physical product

Answer 13

Total output produced/ Units of variable input

Question 14

Prospective costs

Answer 14

Costs that the firm will take into account when making investment decisions and are avoidable as they’re based on the future.

Question 15

Marginal costs

Answer 15

The amount added to total costs resulting from producing one extra unit of output.

Question 16

Increasing returns to scale

Answer 16

Add one more FoP and the output rises faster.

Question 17

Constant returns to scale

Answer 17

Add one more FoP and you recieve one more unit of output.

Question 18

Decreasing returns to scale

Answer 18

When the scale of all factors increases, output rises at a slower rate.

Question 19

Economies of scale

Answer 19

As output increases, long run average costs falls.

Question 20

Diseconomies of scale

Answer 20

As output increases, long run average costs increases.

Question 21

Minimum efficient scale

Answer 21

Internal economies of scale have been fully exploited. It’s the lowest level of output required to exploit full economies of scale

Question 22

How can a firm mover from one SRAC curve to another in the long run?

Answer 22

By increasing capacity and factory size

Question 23

Where does the optimum firm size occur?

Answer 23

After economies of scales have been gaines but before diseconomies of scales sets in.

Question 24

Abnormal profit

Answer 24

Profit over and above normal profits. Also known as supernormal profits.

Question 25

Normal profits

Answer 25

Making just enough profit for a firm to stay in business. Economists treat normal profit as an opportunity cost.

Question 26

Incumbent firms

Answer 26

Firms that are already established in the market.

Question 27

The role of profit in a market economy

Answer 27

• Creation of worker incentives
• Creation of business incentives
• Creation of shareholder incentives
• Resource allocation

Question 28

Technological change

Answer 28

Improving technology that already exists as well as making new technology.
A term used to describe the overall effects or invention, innovention and the diffusion or spread of technology in the economy.

Question 29

Technological progress

Answer 29

Occurs when technological change increases output for the same given factor inputs.

Question 30

Innovation

Answer 30

Improvements to existing technology

Question 31

Invention

Answer 31

Making something entirely new.

Question 32

How technological progress affects market structure?

Answer 32

• Reduces barriers to entry and exit
• Greater scope for competition
• Reduces monopoly power
• High costs
• Requires increased scale of production
• Can create barriers in oligopolistic markets to enter and exit

Question 33

Sustainable innovation

Answer 33

Develop existing markets enabling firms to offer better value and often to compete against each others sustainable improvements.

Question 34

Destructive innovation

Answer 34

Helps create a new market but in doing so eventually disrupts an existing market over time, ny displacing earlier technology.

Question 35

Dynamic efficiency

Answer 35

Occurs in the long run, leading to development of new products and more efficient process that improve productive efficiency.

Question 36

Creative destruction

Answer 36

Innovation leads to the development of new products that displaced firms that currently dominate industries

Question 37

Example of creative destruction

Answer 37

Post replaced by email, books replaced by ebooks

Question 38

Losers from innovation

Answer 38

• old firms loose market share and might go bankrupt
• workers are replaced by machines and might have to learn new skills
• impact of unemployment can affect whole communities

Question 39

Winners from innovation

Answer 39

• Successful firms create new employment and profit

- lower LRAC and improved quality can improve economic growth and ensure new jobs are created in the future

Question 40

Productive efficiency

Answer 40

The level of output where AC of production are minimized.