Economics Module 4

Question 1

What does ‘factors of production’ mean, what are the four factors of production, and what determines their demand?

Answer 1

• Elements needed by a business to produce goods and services
• Land, labour, capital, enterprise
• Demand derived from demand for products they produce

Question 2

What is labour intensive production?

Answer 2

Production that employs a high proportion of labour compared with the amount of capital employed.

Question 3

What is capital intensive production?

Answer 3

Production that employs a high proportion of
capital compared with the amount of labour employed.

Question 4

What is production?

Answer 4

The processes involved in providing goods and services (the stages of production).

Question 5

What is productivity?

Answer 5

Efficiency - a measure of the output per factor of production used over a given period of time.

Question 6

What is total fixed cost?

Answer 6

The sum of all the different types of fixed costs at different outputs.

Question 7

What is total variable cost?

Answer 7

The sum of all the variable costs at different outputs.

Question 8

What is total cost?

Answer 8

The sum of all total fixed costs and total variable costs at different outputs.

Question 9

What does average cost mean, and how do you calculate it?

Answer 9

• It is the cost of producing one unit of a product at a particular output.
• Average cost = Total cost / Output

Question 10

What is average fixed cost?

Answer 10

The total fixed cost divided by the level of output.

Question 11

What is average variable cost?

Answer 11

The total variable cost divided by the level of output.

Question 12

What is average total cost?

Answer 12

The total cost divided by the level of output.

Question 13

What is revenue, and how do you calculate it?

Answer 13

• The sum of money a firm receives from making sales.
• Total revenue = quantity sold x price

Question 14

What is average revenue, and how do you calculate it?

Answer 14

• The revenue received for selling one unit of a product (AKA the price).
• Average revenue = total revenue / quantity

Question 15

What are four possible objectives of firms, and which is the main objective?

Answer 15

• Profit maximisation (main objective)
• Survival
• Social welfare
• Growth

Question 16

How does competition affect prices?

Answer 16

• The greater the competition, the closer the prices charged by rivals
• Market price will be low
• Businesses become price takers

Question 17

What is perfect competition?

Answer 17

A theory that helps economists understand what a perfectly competitive market would look like

Question 18

What are the conditions for perfect competiton?

Answer 18

• Lots of firms competing
• Each produces identical product
• Easy for new firms to enter market/old ones to leave
• Each firm produces small % of overall production in the industry

Question 19

Given the conditions, what would apply in a market with perfect competition?

Answer 19

• All firms charge same price
• Charge lowest price they can without going out of business
• Price equal to lowest average cost of producing goods
• At market price, average cost of production = average revenue
• No firm risks charging more than market price

Question 20

What is a monopoly?

Answer 20

When a single firm controls a large percentage (over 25%) of a particular market.

Question 21

What are the key features of a monopoly/a monopoly’s powers?

Answer 21

• One firm controls the market of an industry
• It is very difficult for new firms to enter the market
• The monopolist is the price maker
• Monopolists make excessive profits

Question 22

What are the advantages of a monopoly?

Answer 22

• In a government monopoly it is run in national interest
• Using economies of scale a monopoly can make high-quality products at a low cost to consumers
• Natural monopolies due to geographical location makes sense
• Having one firm cuts out duplication and waste

Question 23

What are the disadvantages of a monopoly?

Answer 23

• Monopolist may restrict output or raise prices
• Quality of the product may be limited
• Monopolist makes abnormal profits