3.3 Flashcards

Question

What does the AC curve look like?

Answer 1

A U shape.

Answer 2

AVC = TVC/Q

Answer 3

It is the cost of making an additional unit of output.

Answer 4

MC = Change in TC / Change in Q

Answer 5

Initially downwards sloping until it reaches a minimum, it is then upwards sloping. (like a u shape however the duration of upwards slope is greater than the downwards slope)

Answer 6

The cost of producing the next unit is less than the average cost of producing a unit. Therefore this extra unit produced brings down the average cost.

Answer 7

The cost of producing the next unit is more than the average cost of producing a unit. Therefore the extra unit produced causes the average cost to rise.

Answer 8

When AC is at its lowest.

Answer 9

As more units of a variable factor are added to a fixed factor the increase in output eventually falls. (in the short run)

Answer 10

It is the extra output when more unit of the variable factor is added.

Answer 11

A farmer has an orchard of 200 apple trees. The farmer measures his marginal product in terms of baskets of apples. These increase as he hires more labourers to pick the apples. The fixed factor is the orchard, the variable factor is the workers. When an additional worker is taken on, more than double the quantity of apples may be picked because of the cooperation and teamwork involved. However with additional workers being employed the increase in output begins to decline (marginal product falls and marginal cost increases) This is because the apples are harder to pick. When the employment of an additional worker causes a fall in marginal product, diminishing marginal returns set in. It only operates in the short run as in the long run the farmer can plant more apple trees.

Answer 12

The total output of a firm in a given period of time.

Answer 13

It is the unit of output produced per unit of variable factor of production. AP = TP/Q

Answer 14

MP = change in TP / Change in Q

Answer 15

When MP is rising, MC is falling. When MP is falling MC is rising. This is because when MP is high it means each input adds a high level of output as a result its cheap to make extra units resulting in a low MC. When MP falls each unit adds less output thus it becomes more expensive to make extra units and MC rises.

Answer 16

When AP is rising AVC is falling. When AP is falling AVC is rising. This is because if AP is high each worker is producing a lot, it takes fewer workers to produce each unit and AVC is low.

Answer 17

It the short run at least one factor of production is fixed. Thus the SRAC curves are U shaped due to increasing and diminishing marginal returns. Whereas in the long run all factors of production are variable, meaning the firm can adjust machinery and workforce. The LRAC curve is formed from all the lowest points of the SRAC curves. The LRAC curve is U shaped due to economies and diseconomies of scales. The LRAC curve shows the lowest possible cost at each output level when all inputs are variable, while each SRAC curve represents short-run constraints where at least one input is fixed. The shape is one big U with multiple small Us within it.

Answer 18

They are the costs advantages firms gain when they increase their output. When increasing output decreases LRAC.

Answer 19

Internal economies of scale refer to the cost advantages a firm can achieve as a result of its own growth and expansion. These cost reductions are generated from within the firm itself, primarily by optimizing its production processes and utilizing its resources more efficiently.

Answer 20

1- Technical Economies: As a firm grows, it may invest in better machinery and technology, leading to increased efficiency and reduced production costs per unit. 2- Marketing Economies: As a firm grows bigger the cost of advertising is spread out over a larger volume of products 3- Commercial Economies: Large firms are able to bulk buy from their suppliers and negotiate lower prices thus decreasing costs per unit and increasing profitability. 4- Managerial Economies: Larger firms can increase efficiency by employing highly skilled and more experienced managers, who specialise in managing particular parts of the business. 5- Financial Economies: Bigger firms may have better access to capital markets, enabling them to secure loans at lower interest rates. 6- Risk-bearing Economies: Large firms can spread risks by diversification. They can sell a wider range of goods.

Answer 21

It is the output in which the long run average costs are at a minimum.

Answer 22

They occur when an increase in the scale of production results in an exactly proportional increase in output. As a result the LRAC curve will be horizontal.

Answer 23

When an increase in output results in an increase Average costs.

Answer 24

1- Poor communication: communication between managers and workers may become complex. This may result in time delays and workers having less clear instructions from management about what they are supposed to do when. 2- Demotivation: Large businesses tend to be impersonal and workers may not feel valued. This could result in a decrease in productivity and efficiency of employees. 3- X-Inefficiency: As a firm increases in size, administration costs may increase disproportionally. 4- Poor co-ordination: Large firms can become difficult to manage. Coordinating production decisions across a large organisation may result in productivity falling and average costs increasing.

Answer 25

When a whole industry grows larger and firms in that industry benefit from lower long run average costs.

Answer 26

1- Skilled Labour Pool: If multiple firms in a specific industry cluster in a region, a skilled labour force with industry-specific expertise may develop. All firms in the industry can benefit from this shared resource, as it reduces labour training costs. 2- Specialised Suppliers: When several firms in an industry are located close to each other, specialized suppliers may emerge to serve them. These suppliers can provide specialized inputs at lower costs due to proximity. 3- Infrastructure: The development of transportation and communication infrastructure in a region with a concentration of firms can benefit all companies by reducing transportation costs and improving connectivity.

Answer 27

When MR = MC, meaning the firm is not able to increase its profits.

Answer 28

It is where a firm makes sufficient revenue to cover its total costs and remain competitive within the industry.

Answer 29

When AC = AR or TC = TR

Answer 30

Supernormal profit occurs when a firm's total revenue (TR) exceeds its total cost (TC). In other words, the firm is earning more than enough to cover all costs, including the opportunity cost of the resources used.

Answer 31

Supernormal attracts competition into the market which can drive down prices and reduce profit in the long run.

Answer 32

When a firms total costs exceed revenues. TC > TR. Or when the average cost of production is greater than the price per unit.

Answer 33

It is the output at which total costs are equal to total revenue and average costs are equal to average revenue. TC = TR and AC = AR

Answer 34

If AVC < AR then firms should continue production. Each good they make will generate more revenue than it costs for them to make it, and so this will help them to reduce the size of the loss by covering some of the fixed cost. However when AVC > AR then producing more goods will increase the loss. As a result they should leave the industry. Fixed costs arenet considered as they are sunk.

3.3 Flashcards

(60 cards)