Chapter 4

Question 1

Explain the production theory short run and long run

Answer 1

Short run- Law of diminishing returns

Long run- Returns to scale

Question 2

Define productivity

Answer 2

Output per unit of input

Question 3

Define labour productivity

Answer 3

Output per worker

Question 4

Define capital productivity

Answer 4

Output per unit of capital

Question 5

What is the UK productivity puzzle

Answer 5

Failure of labour productivity to recover from a relatively low level compared to others

Question 6

Define firm

Answer 6

Productive organisation which sells its output of goods and or services commercially

Question 7

Define specialisation and division of labour

Answer 7

Specialisation: worker only performing one task or a narrow range of tasks
Division of labour: In a firm many workers perform different tasks in producing a good or service

Question 8

What are the benefits of division of labour

Answer 8

• No need of switching between tasks
• More and better machinery or capital can be employed
• Practice makes perfect

Question 9

Difference between trade and exchange

Answer 9

Trade: buying and selling of goods and service
Exchange: to give something in return for something else recieved

Question 10

Explain short run law of diminishing returns

Answer 10

Short-run law which states that as a variable factor of production is added to a fixed factor marginal and average returns diminishes

Question 11

Define marginal returns of labour

Answer 11

Change in the quantity of total output resulting from the employment of one more worker

Question 12

Difference between short and long run

Answer 12

Short run- at least one fixed factor of production

Long run- all factors are variable

Question 13

Draw law of diminishing returns (TR, MR, AR)

Answer 13

…

Question 14

Define total returns, average returns

Answer 14

Total returns: the whole output produced by all factors of production employed by a firm

Average returns: Total output/ total n of employed

Question 15

What is returns to scale

Answer 15

The rate at which output changes if the scale of all the factors of production is changed

Question 16

Define the 3 kinds of returns to scale

Answer 16

Increasing: Output is proportionally higher than input
Constant: Output is proportional to input
Decreasing: Output is proportionally lower to input

Question 17

Explain the difference between short and long run costs of production

Answer 17

Short run: Fixed + variable

Long run: Variable

Question 18

Draw Returns and Cost graph (MR, AR, MC, AVC)

Answer 18

…

Question 19

Difference between total, average and marginal cost

Answer 19

Total: All costs incurred when producing a particular size
Average: Total cost / number of workers
Marginal: Cost by each additional worker

Question 20

Draw short run average cost curve (AFC, AVC, ATC,MC)

Answer 20

…

Question 21

What is a business objective

Answer 21

Profit maximise

Question 22

What is assumed that a firm will do if cost of labour cost is high

Answer 22

Less labour will be employed and capital becomes more attractive

Question 23

Explain economies of scale

Answer 23

As output increases long run average cost falls

Question 24

Explain diseconomies of scale

Answer 24

As output increases, long run average cost rises

Question 25

Draw Economies and Diseconomies of scale

Answer 25

…

Question 26

Draw Economies and diseconomies of scale with LRAC and SRATC | And explain

Answer 26

SRATC represents a particular firm size Long run, firm will move from one to another short run average total cost curve LRAC curve forms a tangent to the SRATC

Question 27

Explain internal and external economies and diseconomies of scale

Answer 27

Internal Economies and diseconomies : Changes in long run average costs of production due to changes in size or scale of firm or plant External Economies: Changes in long run average costs of production due to growth of market or industry of which the firm is a part

Question 28

Reasons for internal economies of scale

Answer 28

- Technical (indivisibilities) - Managerial - Marketing (bulk buying and bulk selling) - Financial or capital raising - Risk bearing (Less risk as higher firm) - Economies of scope (range of goods)

Question 29

Reasons got internal diseconomies of scale

Answer 29

- Managerial - Communication failure - Motivational

Question 30

What is the relationship between returns to scale and (dis)economies of scale

Answer 30

Higher returns to scale=economies of scale

Question 31

Reasons for economies and diseconomies of scale

Answer 31

clustering of individuals- competition, more trained

Question 32

Draw different kinds of economies and diseconomies of long run average cost curve

Answer 32

- Normal - Horizontal LRAC - Quick slope up to Diseconomies of scale - Slow slope up to Diseconomies of scale

Question 33

What is long run marginal cost

Answer 33

Additional cost incurred if firm increases output when all factors are variable

Question 34

What is the L shaped long run average cost curve

Answer 34

No Diseconomies of scale, MES (minimum efficient scale)

Question 35

Define MES

Answer 35

Lowest output at which long run average costs have been reduced to fully benefit from economies of scale

Question 36

Difference between: Total revenue- Average revenue- Marginal revenue-

Answer 36

Total revenue- all money received by a firm from selling its output Average revenue- Total revenue / output Marginal revenue- Addition to total revenue resulting from an additional sale

Question 37

Explain what are the conditions of Perfect competition

Answer 37

- Large number of buyers and sellers - Perfect information - Consumers can buy as much as they want and producers sell as much as they want at the market ruining price - Homogenous products - No barriers to entry or exit

Question 38

Draw a competitive firm as being a price taker

Answer 38

…

Question 39

Draw Revenue in a monopoly (AR, MR) | aswell as gain and loss of revenue

Answer 39

…

Question 40

Why does Demand = AR

Answer 40

Because each additional revenue is the same due to being the demand

Question 41

Explain a monopoly as a price maker and quantity setter

Answer 41

Price maker- firm possesses marker power to sell at any price Quantity setter- possesses marker power to set the quantity of a good

Question 42

Relationship between marginal and total revenue

Answer 42

As marginal revenue increase total increases by same increment

Question 43

What is profit

Answer 43

Revenue - cost

Question 44

Define profit maximisation

Answer 44

Level of output at which total profit is greatest

Question 45

Difference between normal and abnormal profit

Answer 45

Normal- Minimum amount a profit must make to stay in business Abnormal- profit over and above normal

Question 46

Role of profit in an economy

Answer 46

- Creation of worker incentive - Creation of shareholder incentive - Profit for innovation and risk taking - Business finance

Question 47

Define technological change

Answer 47

Describe overall effect of invention, innovation and spread of technology in an economy

Question 48

Difference between technological change and technological progress

Answer 48

Technological change: improving welfare | Technological progress: Scientific improvement, not necessarily about welfare

Question 49

Difference between invention and innovation

Answer 49

Invention: Making something entirely new Innovation: Making a significant contribution to something already invented

Question 50

What effect does technological change have on economic performance

Answer 50

- Methods of production | - Productivity

Question 51

Define productive efficiency

Answer 51

Impossible to produce more of one good without less of another

Question 52

Define Dynamic efficiency

Answer 52

Measures improvement in productive efficiency in the long run

Question 53

Define creative destruction

Answer 53

Capitalism evolving and renewing itself over time through new technologies and innovations replacing older ones