Chapter 11: Firm Behaviour - Efficiency Production + Short Run Production

Question 1

What is a production function? (2)

Answer 1

• technological relationship that specifies how much output can be produced with specific amounts of inputs
• so quantity of inputs a firm uses and quantity outputs it produces

Question 2

What is technological efficiency?

Answer 2

• means the maximum output is produced with the given set of inputs

Question 3

How can we achieve an economically efficient production structure?

Answer 3

we produce output at the least cost

Question 4

What is a fixed input?

Answer 4

• input whose quantity is fixed for a particular period and cannot be varied

Question 5

What is a variable input?

Answer 5

an input whose quantity the firm can vary at any time

Question 6

What is short run production?

Answer 6

at least one factor of production is fixed
- usually we consider capital to be fixed and labour variable

Question 7

What is a long run production?

Answer 7

• all factors of production can be adjusted
  ie enough time to change everything

Question 8

What is very long run production?

Answer 8

• new technology appears

Question 9

What are the two inputs for short run production?

Answer 9

• Labour (L) and capital (K)

Question 10

Capital is ____ fixed/variable in the short run?

Answer 10

• fixed

Question 11

General formula for production

Answer 11

know that it SR does not have to be an equation, it can be a relationship or chart

Question 12

What should we know for short run production? (3)

Answer 12

• total product (TP)
• Marginal Product (MP)
• Average product (AP)

Question 13

What is total production?

Answer 13

• the total quantity or total output that is produced

Question 14

Which letter denotes total production?

Answer 14

• Y or Q

Question 15

What is average production?

Answer 15

• also called labour productivity
• output per unit of labour

Question 16

What is the formula for average production?

Answer 16

AP = total product/Labour Input

Question 17

What is Marginal Product (MP)?

Answer 17

• the extra output associated with adding a unit of variable input to the production process

Question 18

Marginal Product formula

Answer 18

Question 19

TP, MP, AP graphs

Answer 19

Question 20

What is the Law of Diminishing Returns?

Answer 20

• Marginal product eventually diminishes and may even become negative

Question 21

What are the three stages of the Law of diminishing returns?

Answer 21

1. increasing marginal returns
2. Diminishing Marginal Returns
   - MP falling
3. Negative Marginal returns
   see graphs

Question 22

What happens to marginal product if average product is rising?

Answer 22

• marginal product must be ABOVE the average product

Question 23

What happens to marginal product if the average product is falling?

Answer 23

MP must be below average product
so on graph, MP always cuts AP at max AP