Production

Question 1

production function

Answer 1

maximum possible output from a given set of factor inputs (the relationship between quantity of inputs and the total product)

see mankiw

Question 2

marginal product

Answer 2

change in output resulting from the use of one more unit of a factor input

Question 3

law of DMR

Answer 3

law stating
that if a firm increases
its inputs of one factor
of production while
holding inputs of other
factors fixed, eventually
the firm will get
diminishing marginal
returns from the
variable factor

when explaining, make sure to explain why, i.e. initial productivity improvement from better utilisation and DOL/specialisation but then marginal productivity declines, extra workers contribute more to MC than MP

Question 4

average product

Answer 4

TP divided by number of workers employed - measure of productivity

Question 5

ATC

Answer 5

average total cost:
total cost divided by
the quantity produced;
sometimes known as
unit cost

Question 6

total cost

Answer 6

sum of all
costs that are incurred
in producing a given
level of output (including
opportunity cost)

Question 7

sunk costs

Answer 7

costs
incurred by a firm that
cannot be recovered if
the firm ceases trading

Question 8

short run

Answer 8

period during which at least one FOP is fixed and usually only labour is variable

Question 9

long run

Answer 9

period over
which the firm is able to
vary the inputs of all its
factors of production

Question 10

very long run

Answer 10

time period when all key FOPs are variable, and additional factors outside the control of the firm can change like the state of technology and government policy

Question 11

returns to scale

Answer 11

increasing - when a
percentage increase
in inputs results in
a larger percentage
increase in output

constant -

decreasing -

Question 12

economies of scale

Answer 12

occur for a firm when
an increase in the scale
of production leads to
production at lower
long-run average cost

internal - occur as a single firm expands

external - occur due to the expansion of the industry in which the firm operates

Question 13

diseconomies of scale

Answer 13

occur for a firm when
an increase in the scale
of production leads
to higher long-run
average costs

Question 14

minimum efficient scale

Answer 14

the level of
output at which longrun average cost
stops falling as output
increases

Question 15

X-inefficiency

Answer 15

situation arising when
a firm is not operating
at minimum cost due to lack of competition leading to complacency, i.e.
organisational slack

Question 16

TR

Answer 16

revenue received by a
firm from its sales of a
good or service; it is the
quantity sold, multiplied
by the price

Question 17

AR

Answer 17

the average revenue
received by the firm per
unit of output; it is total
revenue divided by the
quantity sold

Question 18

MR

Answer 18

the additional revenue
received by the firm if it
sells an additional unit
of output

Question 19

normal profits

Answer 19

the return needed for a firm
to stay in a market in
the long run

Question 20

SNP

Answer 20

profits earned above normal profit

Question 21

subnormal profit

Answer 21

that which is earned below normal profits

Question 22

accounting profits

Answer 22

the profits made by
a business based
on explicit costs
incurred but excluding
opportunity cost

Question 23

SR shutdown price

Answer 23

the price below
which a firm will choose
to exit the market in the
short run because it
is not able to cover its
fixed costs

Question 24

LR shutdown price

Answer 24

the price
below which a firm
will choose to exit the
market in the long run
because it is not able
to cover its long-run
average total costs