Micro 4: Productivity, A Firm's Costs and the Supply Curve

Question 1

What is short run analysis?

Answer 1

We assume at least one factor of production is fixed, normally the capital.

Question 2

What is long run analysis?

Answer 2

Assumes that all factors of production can change.

Question 3

What does it mean if analysis is on the margin?

Answer 3

The person making decisions (the producer) assesses the impact of one more additional member of staff and decides what would be the optimal number of workers to employ.

Question 4

What is marginal physical product?

Answer 4

The increase in output of each new member of staff.

Question 5

How is output calculated?

Answer 5

Number of product/ day

Question 6

How is productivity calculated?

Answer 6

Daily output/ worker

Question 7

How is marginal product calculated?

Answer 7

Output of n workers - output of n-1 workers

Question 8

What are increasing (marginal) returns?

Answer 8

The phenomenon whereby increasing one variable input (usually labour) leads to increasing marginal product (and productivity) of that input. (eg. as more staff are employed, each new member of staff leads to an increase in productivity).

Question 9

What are diminishing (marginal) returns?

Answer 9

The phenomenon whereby additional staff employed lead to a decline in marginal product of labour and a decline in the total product and marginal product (eg. as new members of staff are employed, each new member of staff causes a fall in productivity).

Question 10

What does productively efficient mean?

Answer 10

Where the quantity produced per unit input is maximised for a firm or where factor inputs required for each unit produced are minimised.

Question 11

What is total cost?

Answer 11

The total cost of production at any level of output. This is equal to variable costs + fixed costs.

Question 12

What are fixed costs?

Answer 12

Costs that do not vary as output increases. This includes payments on rent, salaries, interest on loans, advertising and business rates.

Question 13

What are variable costs?

Answer 13

Costs which do vary directly with increases in output increases. Depending upon which factors are variable, this may include the cost of raw materials and wages paid to labour.

Question 14

What are semi-fixed costs?

Answer 14

Costs which may vary with output but not directly, eg. energy.

Question 15

What is average cost?

Answer 15

The cost per unit produced. How much the firm has to pay in factor costs for each unit produced at different levels of output.
Formula: AC= TC/Q, where Q is the total output of the firm.

Question 16

What is marginal cost?

Answer 16

The additional cost incurred when output is increased by an additional unit.
Formula: MC = TCn units - TCn-1

Question 17

What is average variable cost and average fixed cost?

Answer 17

Formulae:
AVC = TVC/Q,
AFC = TFC/Q

Question 18

What is total variable cost?

Answer 18

TC - TFC

Question 19

What is average total cost and marginal cost?

Answer 19

ATC = TC/Q
MC = change in TC/ change in Q

Question 20

Where is the most productively efficient level of output on the graph?

Answer 20

When the total average cost crosses marginal cost. Output per worker/ wage cost is maximised.

Question 21

What is supply?

Answer 21

The total quantity of a good or service that producers are willing and able to provide at a range of prices over a given period of time.

Question 22

What does a shift in the supply curve illustrate?

Answer 22

A change in the quantity supplied, which is a change in the amount of goods actually supplied by producers. This is perhaps the consequence of a change in the price level.

Question 23

Can changes in price directly affect the supply of a good?

Answer 23

No, they cannot directly cause a shift in supply. This is because the supply curve already illustrates what happens as prices rise and fall; that is the purpose of the curve.

Question 24

What are the factors that cause a shift to the supply curve?

Answer 24

Productivity. Higher productivity causes an outward shift in supply, because average costs for the firm fall.
Indirect tax. Inward shift in supply.
Number of firms. The more firms there are, the larger the supply.
Technology. More advanced technology causes an outward shift in supply.
Subsidies. Outward shift in supply.
Weather. Favourable conditions will increase supply, particularly for agricultural produce.
Costs of production. If they fall, the firm can afford to supply more. If they rise, like with higher wages, there will be an inward shift in supply.
Also, depreciation in the exchange rate increases the cost of imports, which will cause an inward shift in supply.

Question 25

How do you calculate total fixed costs?

Answer 25

TC - TVC

Question 26

How do you calculate average fixed costs?

Answer 26

TFC / Q
Or AC - AVC

Question 27

What are three factors that can explain the shape of the supply curve?

Answer 27

Diminishing marginal returns
Higher costs
Profit incentive

Question 28

When is total revenue maximised?

Answer 28

When marginal revenue is 0.

Question 29

When does marginal product cut average product?

Answer 29

At its highest point.

Question 30

Why are there increasing returns to labour with the first few workers?

Answer 30

Labour productivity rises because there’s specialisation and division of labour (workers taught by previous workers and tasks split for efficiency) and under-utilisation of fixed factors of production (eg. if 3 ovens we need 3 workers to get the full use out of them). Marginal product rises as there’s more output with each new worker.

Question 31

Why does marginal product fall after a certain number of workers?

Answer 31

MP and labour productivity falls because fixed factors of production become a constraint on production (not enough resources for all the workers, they get in each other’s way and affect output).

Question 32

When is total product maximised?

Answer 32

When marginal produc is 0 because there’s no more MP to bring in.

Question 33

What do total fixed costs look like on the graph?

Answer 33

Horizontal line because unchanging.

Question 34

What do average fixed costs look like on the graph?

Answer 34

Downwards sloping because TFC stay the same and quantity rises so it’s being divided by a bigger number each time so AFC falls.

Question 35

What is the relationship between law of diminishing returns with AFC, TFC and average variable costs?

Answer 35

Doesn’t affect AFC and TFC.
Affects AVC (curve goes down then up on graph)

Question 36

What’s the relationship between MP and AP and MC and AC?

Answer 36

They’re reflections of each other.
MP and AP- curve up then down bc more efficiency means more products at start
MC and AC- curve down then up bc more efficiency means less costs at start

Question 37

What is the shape of TVC and why?

Answer 37

Upwards sloping then goes right then upwards sloping again because output is increasing at faster rate than costs at first as there’s under-utilised capital and specialisation hasn’t taken place yet, then as we increase workers diminishing returns kicks in because of over-utilisation of capital and constraint on production so costs rise faster than output so curve becomes steep again.

Question 38

What is the shape of TC and why?

Answer 38

TC = TFC + TVC
TFC is constant so TC is TVC but higher. Starts at TFC because at that point TVC is 0.