costs

Question 1

total product (TP)

Answer 1

the total output produced by all workers

Question 2

marginal product (MP)

Answer 2

This is the output produced by an extra worker

Question 3

Diminishing returns occurs when?

Answer 3

in the short run when one factor is fixed (e.g. Capital) If the variable factor of production (labour) is increased, there comes a point where extra workers will become less productive.

Question 4

When diminishing returns occurs, there will be?

Answer 4

a decreasing Marginal Product (MP) and increasing Marginal Cost (MC). This is because if capital is fixed extra workers will eventually get in each other’s way as they attempt to increase production.

Question 5

A firm’s long run cost curve (LRAC) is constructed by?

Answer 5

using the point of tangency with its short run cost curves. Therefore the LRAC is an envelope of all the SRAC.

Question 6

Economies of scale occur when?

Answer 6

average costs fall with increasing output. Therefore, increasing production leads to increasing returns to scale and there is greater efficiency. Internal economies of scale occur when an individual firm becomes more efficient.

Question 7

Internal economies include: (1)

Answer 7

1. Specialization and division of labour: In large-scale operations workers can do more specific tasks. With little training they can become very proficient in their task; this enables greater efficiency. A good example is an assembly line with many different jobs.
2. Bulk buying: If you buy a large quantity then the average costs will be lower
3. Financial economies: A bigger firm can get a better rate of interest than small firms.

Question 8

Internal economies include: (2)

Answer 8

4. Technical: When a firm benefits from increased scale of production. For example, a large machine (e.g. blast furnace / combine harvester) would be inefficient for small-scale production; for higher rates of production, the firm gains a better rate of return.
5. Marketing. A national TV advertising campaign is more efficient for a large firm.
6. Risk Bearing. Bigger firms are able to diversify into different areas. This gives them a greater ability to avoid an economic downturn.

Question 9

External economies of scale occurs when?

Answer 9

firms benefit from the whole industry getting bigger. E.g. if the industry gets bigger all firms will benefit from better infrastructure, access to specialized labour and good supply networks.

Question 10

Diseconomies of scale occurs when?

Answer 10

long run average costs start to rise with increased output. Therefore there will be decreasing returns to scale.

Question 11

Diseconomies of scale can occur for the following reasons:

Answer 11

1. Poor communication in a large firm with many workers
2. Alienation: working in a highly specialized assembly line can be very boring, therefore workers become de motivated.
3. Lack of control: when there are a large number of workers it is easier to escape with not working very hard.

Question 12

If the MES was 10,000 cars a week and the total industry demand was 40,000. This would mean that?

Answer 12

the optimal number of firm would be 4.

Question 13

Minimum efficiency scale

Answer 13

The lowest scale necessary for it to achieve the economies of scale required to operate efficiently and competitively in its industry. No further significant economies of scale can be achieved beyond this scale. When minimum efficient scale is low, relative to the size of the whole industry, a large number of firms can operate efficiently, as in the case of most retail businesses, like corner shops and restaurants. When it’s high it makes a monopoly e.g gas, water

Question 14

Total revenue calculation

Answer 14

Price x output

P x Y