3.3.2 Costs

Question 1

What is the economic cost of production for a firm?

Answer 1

This is the opportunity cost of production; the value that could have been generated had the resources been employed in their next best use.

Question 2

Are CELLS fixed in the short run; yes or no?

Answer 2

labour is variable and everything else is fixed

Question 3

In the long-run all factors of production are fixed?

Answer 3

No they are all variable

Question 4

Define total costs?

Answer 4

The cost of producing a given level of output.

Question 5

define total fixed costs?

Answer 5

costs that do not change without e.g rent

Question 6

define variable costs?

Answer 6

costs that change directly with output e.g materials

Question 7

How does the concept of sales maximization work?

Answer 7

• Managers also aim to maximize the growth of their company- aka salary is linked with the size of the company.
• it is easier to judge the level of growth than profit as it increases the status of the business.
• the size matters as the bigger the firm the more they are likely to survive through rough periods and less likely to get into financial trouble.
• growth will increase market share and push other businesses, it will enable to have more market power and setting prices.
• for them to sales maximise the firm wants the highest level of sales without making a loss.
• managers also want to sale maximise because they can be promoted by how many goods they are selling.
• and firms will always want supernormal profit to keep shareholders happy because AR is above AC so they will want more profits

Question 8

What is profit satisificing?

Answer 8

• the principal-agent problem is huge since shareholders and managers have different viewpoints.
• managers will then overcome this issue by following the profit satisficing objective, where they make enough profit to keep shareholders happy, they will use other techniques like increasing their own salaries so costs rise.

Question 9

What other aims could firms want?

Answer 9

Managerial utility maximization- some managers will make decisions that will satisfy their satisfaction.
marginal cost- this is where firms want to maximize social welfare.

Question 10

Define diminishing marginal productivity?

Answer 10

• when one CELL is fixed and the business wants to expand it will cause a slight issue.
• however they can increase labor- by investing more efficient machinery and this will lead to production increasing.
• however, it is time consuming for the factory to expand and adding more labour will have less of an impact.
• aka known as the law of diminishing returns

Question 11

Define the law of diminishing returns properly?

Answer 11

This states that if a variable factor increases when another factor is fixed. This will lead to an extra unit of variable factor will produce less extra output than the previous one.

Question 12

Why is the average ATC curve in a U shape?

Answer 12

This is shaped in a U-curve because of the law of diminishing marginal productivity. This means costs will rise as machinery is used more effectively but as the factory starts expanding, efficiency will fall because its overused.

Question 13

Why is marginal cost in a U shape?

Answer 13

This has a U-shape because of the law of diminishing marginal productivity. It will start falling as machines are used more efficiently but it will rise as production rises.

Question 14

What does the average fixed cost curve look like?

Answer 14

This stays the same at all levels of output, its just the curve will fall as output starts rising

Question 15

why does the short-run curve have a U shape?

Answer 15

This is because of the law of diminishing returns

Question 16

why does the long-run curve have a U shape?

Answer 16

This is because of economies and diseconomies of scale.

Question 17

Why is the LRAC curve shapes upward U shape?

Answer 17

• the firm will experience economies of scale and see a fall in LRAC.
• then they will experience constant returns to scale where LRAC becomes constant.
• finally it will experience diseconomies of scale and LRAC is rising

Question 18

what is the definition of Long run average cost curve?

Answer 18

this represents the minimum level of average costs attainable at any given level of output

Question 19

If the point is above the LRAC or below, what does this mean?

Answer 19

When the point is under the curve it’s unattainable and also producing above it’s inefficient.

Question 19

If the point is above the LRAC or below, what does this mean?

Answer 19

When the point is under the curve it’s unattainable and also producing above it’s inefficient.

Question 20

When there is a movement in the LRAC curve, what does this mean?

Answer 20

This is a change in output which changes the average cost of production- this only happens when there is internal economies and diseconomies of scale.