Chapter 11: Output and Costs

question

Decision Time Frames
What is the entrepreneur's biggest decision?

answer

Which industry to establish a firm. (Often driven by passion and background knowledge/interest, can also be where there is expected economic profit)

question

Decision Time Frames
What is the short run time frame?

answer

When the quantity of at least one factor of production is fixed.

question

Decision Time Frames
What is the plant?

answer

The fixed factors of production. In the short run it is fixed.

question

Decision Time Frames
What is the long run time frame

answer

All factors of production can be variable. Firm can change its plant.

question

Decision Time Frames
What is a sunk cost?

answer

Past expenditure on a plant that has no resale value. Irrelevant to a firm's current decisions.

question

Short-Run Technology Constraint
What points are efficient? (Product Curve)

answer

Only points on the total product curve are technologically efficient.

question

Short-Run Technology Constraint
What are the two features of most product curves?

answer

1) Increasing marginal returns initially (most)
2) Decreasing marginal returns eventually (all)

question

Short-Run Technology Constraint
Increased marginal returns occurs because of? (2)

answer

1) Increased specialization
2) Division of labour in the production process

question

Short-Run Technology Constraint
When does diminishing marginal returns occur?

answer

When marginal product of an additional worker is less than the marginal product of the previous worker. It occurs because more and more people are working in the same space.

question

Short-Run Technology Constraint
How does MP and AP relate? (3)

answer

1) MP intersects AP at maximum
2) MP>AP AP is increasing
3) MP<AP AP is decreasing

question

Short-Run Cost
Total fixed cost includes: (2)

answer

1) Cost of renting capital (plant costs)
2) Normal profit

question

Short-Run Cost
What happens to the vertical distance between AVC and ATC as output increases?

answer

It shrinks because the AFC declines with increasing output.

question

Short-Run Cost
How does MC and AC curves relate? (3)

answer

1) MC intersects both AVC and ATC at minimum
2) When MC<AVC/ATC AVC/ATC is decreasing
3) When MC>AVC/ATC AVC/ATC is increasing

question

Short-Run Cost
Why is the ATC U-shaped? (2)

answer

1) Spreading total fixed cost over a larger output
2) Eventual diminishing returns

question

Short-Run Cost
What is the relationship between AP, MP and AVC and MC? (3)

answer

1) AP is max when AVC is min | MP is max when AP is min
2) As MP increases MC decreases | AP increases, AVC decreases
3) As MP decreases MC increases | AP decreases, AVC increases

question

Short-Run Cost
What are the two factors that position a firm's short run costs?

answer

1) Technology (at small outputs, ATC might increase, but at large outputs ATC decreases)
2) Prices of factors of production

question

Long-Run Cost
The production function is the relationship between:

answer

Maximum output attainable and the quantities of both labour and capital.

question

Long-Run Cost
What are Q, L, K, W and R

answer

Q = Quantity, L = Labour, K = Capital, W = Wages, R = Capital Cost (Rent)

question

Long-Run Cost
What are economies of scale and when do they occur?

answer

Features of a firm's technology that make ATC fall as output increases. Slope downward on LRAC curve.

question

Long-Run Cost
What are diseconomies of scale and when do they occur?

answer

Features of a firm's technology that makes average total cost rise as output increases. Slope upward on LRAC curve.

question

Long-Run Cost
What is a constant return to scale?

answer

Average total cost is constant as output increases. (Replicating a plant rather than adding more capital)

question

Long-Run Cost
What is minimum efficient scale?

answer

Smallest output at which long-run average cost reaches its lowest level.

question

Long-Run Cost
How does minimum efficient scale determine how many firms in market?

answer

If MES is small, room for many firms; if large room for few firms.

1 of 23

question

Decision Time Frames
What is the entrepreneur's biggest decision?

answer

Which industry to establish a firm. (Often driven by passion and background knowledge/interest, can also be where there is expected economic profit)

question

Decision Time Frames
What is the short run time frame?

answer

When the quantity of at least one factor of production is fixed.

question

Decision Time Frames
What is the plant?

answer

The fixed factors of production. In the short run it is fixed.

question

Decision Time Frames
What is the long run time frame

answer

All factors of production can be variable. Firm can change its plant.

question

Decision Time Frames
What is a sunk cost?

answer

Past expenditure on a plant that has no resale value. Irrelevant to a firm's current decisions.

question

Short-Run Technology Constraint
What points are efficient? (Product Curve)

answer

Only points on the total product curve are technologically efficient.

question

Short-Run Technology Constraint
What are the two features of most product curves?

answer

1) Increasing marginal returns initially (most)
2) Decreasing marginal returns eventually (all)

question

Short-Run Technology Constraint
Increased marginal returns occurs because of? (2)

answer

1) Increased specialization
2) Division of labour in the production process

question

Short-Run Technology Constraint
When does diminishing marginal returns occur?

answer

When marginal product of an additional worker is less than the marginal product of the previous worker. It occurs because more and more people are working in the same space.

question

Short-Run Technology Constraint
How does MP and AP relate? (3)

answer

1) MP intersects AP at maximum
2) MP>AP AP is increasing
3) MP<AP AP is decreasing

question

Short-Run Cost
Total fixed cost includes: (2)

answer

1) Cost of renting capital (plant costs)
2) Normal profit

question

Short-Run Cost
What happens to the vertical distance between AVC and ATC as output increases?

answer

It shrinks because the AFC declines with increasing output.

question

Short-Run Cost
How does MC and AC curves relate? (3)

answer

1) MC intersects both AVC and ATC at minimum
2) When MC<AVC/ATC AVC/ATC is decreasing
3) When MC>AVC/ATC AVC/ATC is increasing

question

Short-Run Cost
Why is the ATC U-shaped? (2)

answer

1) Spreading total fixed cost over a larger output
2) Eventual diminishing returns

question

Short-Run Cost
What is the relationship between AP, MP and AVC and MC? (3)

answer

1) AP is max when AVC is min | MP is max when AP is min
2) As MP increases MC decreases | AP increases, AVC decreases
3) As MP decreases MC increases | AP decreases, AVC increases

question

Short-Run Cost
What are the two factors that position a firm's short run costs?

answer

1) Technology (at small outputs, ATC might increase, but at large outputs ATC decreases)
2) Prices of factors of production

question

Long-Run Cost
The production function is the relationship between:

answer

Maximum output attainable and the quantities of both labour and capital.

question

Long-Run Cost
What are Q, L, K, W and R

answer

Q = Quantity, L = Labour, K = Capital, W = Wages, R = Capital Cost (Rent)

question

Long-Run Cost
What are economies of scale and when do they occur?

answer

Features of a firm's technology that make ATC fall as output increases. Slope downward on LRAC curve.

question

Long-Run Cost
What are diseconomies of scale and when do they occur?

answer

Features of a firm's technology that makes average total cost rise as output increases. Slope upward on LRAC curve.

question

Long-Run Cost
What is a constant return to scale?

answer

Average total cost is constant as output increases. (Replicating a plant rather than adding more capital)

question

Long-Run Cost
What is minimum efficient scale?

answer

Smallest output at which long-run average cost reaches its lowest level.

question

Long-Run Cost
How does minimum efficient scale determine how many firms in market?

answer

If MES is small, room for many firms; if large room for few firms.

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Chapter 11: Output and Costs

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