Firm Behaviour

Question 1

What is a producer?

Answer 1

A producer is an entity which produces goods and/or services for sale

Question 2

What is a firm?

Answer 2

A firm/company is a producer with particular legal status

Question 3

A firm would typically have to make decisions about: (5)

Answer 3

• Startup and working finance
• Choosing techniques and purchase of capital goods
• Purchase of inputs (including labour)
• Setting prices
• Distributing profits

Question 4

Direct Costs (definition)

Indirect Costs (definition)

Unit Costs (definition)

Answer 4

Direct costs are those which are directly attributable to producing a specific unit of output

Indirect cost are those which are general costs incurred due to the operation of the company

Unit cost is the direct cost plus total indirect costs divided by the output

Question 5

The above would suggest that, given direct costs, a firm can reduce its unit costs by increasing production. Can it do so indefinitely? (2)

Answer 5

No, for two reasons. Firstly, the firm intends to sell its products and so must consider consumer demand (inventories?).

Secondly, at a point in time the firm will have a given production capacity.

Question 6

Normal capacity is not…

Answer 6

Normal production

Question 7

Capacity

The laptop factory has a premises, some equipment, some production staff and some component inputs. Given these, there will be a limit to the number of laptops which can be produced.

What is normal capacity?

What is maximum capacity?

Answer 7

‘Normal’ capacity is the amount which could be produced under the normal conditions of operation (e.g. staff working forty hours per
week, perhaps no night or weekend shifts, no extraordinary purchases of equipment or input materials).

‘Maximum’ capacity is the absolute maximum which could be produced if operating conditions were varied in the short-term (e.g. asking staff to do overtime but not building new premises or buying new equipment/inputs with a long lead time).