Theory of supply

Question 1

What is the theory of supply?

Answer 1

The study of the relationship between factor inputs (factors of production) and outputs

Question 2

State and define the factors of production

Answer 2

Land: all the natural resources which are used in production
Labour: all human attributes, physical and mental that are used in production
Capital: goods which are not for current consumption, but which will assist consumer goods to be produced in the future
Entrepreneur: a person who organizes the production of goods and services

Question 3

What is the difference between the short run and the long run based on this theory?

Answer 3

Short run is the period of time over which at least one factor of production is fixed. However, the long run is the period of time over which all factors of production are varied

Question 4

What is the difference between a fixed factor and a variable factor?

Answer 4

A fixed factor is an input that cannot be increased in supply within a given period, while a variable factor an input that can be increased in supply within a given period.

Question 5

What is the law of diminishing returns?

Answer 5

As additional units of a variable factor are added toa given quantity of fixed factors, the average and marginal products of the variable factor will eventually decline.

Question 6

What is total product?

Answer 6

The total output produced by a firm at a given level of capital and labour employment

Question 7

State the average product formula

Answer 7

Total product/ Labour

Question 8

State the marginal product formula

Answer 8

Change in total product/ Change in labour