Economics Chapter on Production and Elasticity
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Questions and Answers

What does Ed stand for in the given content?

  • Educational Development
  • Elderly Division
  • Effective Demand (correct)
  • Economic Development

    • LowerSegmentent is a valid term in the content.

    False

    What is the formula for calculating Ed as given in the content?

    LS/US or BE/AB

    Ed is equal to the ratio of ______ to ______.

    <p>LS to US</p> Signup and view all the answers

    Match the terms to their corresponding definitions:

    <p>Ed = Effective Demand calculation LS = Lower Segment US = Upper Segment BE = Basis of Economy</p> Signup and view all the answers

    What does the average product (AP) represent?

    <p>Average amount of output per unit of input</p> Signup and view all the answers

    The marginal product (MP) is at its maximum when it is equal to the average product (AP).

    <p>True</p> Signup and view all the answers

    What happens to the average product when marginal product is greater than average product?

    <p>Average product rises</p> Signup and view all the answers

    Fixed factors are __________ because they cannot be divided into smaller units.

    <p>indivisible</p> Signup and view all the answers

    Which of the following statements is accurate regarding the law of variable proportion?

    <p>At least one factor of input is fixed</p> Signup and view all the answers

    Match the scenario with its effect on average product (AP):

    <p>MP = AP = AP is at maximum MP &gt; AP = AP rises MP &lt; AP = AP falls</p> Signup and view all the answers

    According to the assumptions of the law of variable proportion, the technique of production does change.

    <p>False</p> Signup and view all the answers

    How is the average product (AP) curve typically shaped?

    <p>Inverted V shape</p> Signup and view all the answers

    What type of relationship does elasticity have in relation to slope?

    <p>Inverse relationship</p> Signup and view all the answers

    If total expenditure increases as price decreases, the demand is considered elastic.

    <p>True</p> Signup and view all the answers

    What does Ed represent in the context of demand?

    <p>Elasticity of demand</p> Signup and view all the answers

    The formula for calculating total expenditure is TE = _____ × Quantity.

    <p>Price</p> Signup and view all the answers

    Match the following types of elasticity with their descriptions:

    <p>Unit elastic = Ed = 1 Elastic = Ed &gt; 1 Inelastic = Ed &lt; 1 Perfectly elastic = Ed = ∞</p> Signup and view all the answers

    If demand is unit elastic, which of the following is true?

    <p>Total expenditure remains constant when price changes</p> Signup and view all the answers

    A positive relation between price and total expenditure indicates that the demand is inelastic.

    <p>True</p> Signup and view all the answers

    What signifies a negative relationship between total expenditure and price?

    <p>Elastic demand</p> Signup and view all the answers

    What shape is the Average Cost (AC) curve described in the content?

    <p>U-shaped</p> Signup and view all the answers

    The Average Fixed Cost (AFC) can be zero as output increases.

    <p>False</p> Signup and view all the answers

    Describe the relationship between Total Variable Cost (TVC) and Average Variable Cost (AVC).

    <p>Average Variable Cost (AVC) is calculated by dividing Total Variable Cost (TVC) by the level of output.</p> Signup and view all the answers

    The Average Fixed Cost (AFC) curve is ___ as output increases.

    <p>decreasing</p> Signup and view all the answers

    Match the following cost concepts with their correct descriptions:

    <p>Average Cost (AC) = Total Cost divided by output Average Variable Cost (AVC) = Variable Cost per unit of output Average Fixed Cost (AFC) = Fixed Cost per unit of output Total Variable Cost (TVC) = Variable costs associated with production</p> Signup and view all the answers

    What can be observed about the Average Cost (AC) curve behavior as output increases?

    <p>Decreases then increases</p> Signup and view all the answers

    The Average Variable Cost (AVC) increases continuously with output.

    <p>False</p> Signup and view all the answers

    The Total Fixed Cost (TFC) is the cost that ___ regardless of output.

    <p>remains constant</p> Signup and view all the answers

    What relationship indicates that demand is unit elastic?

    <p>Price elasticity (Ea) equals 1</p> Signup and view all the answers

    When demand is more than unit elastic, an increase in price leads to a less than proportionate increase in total expenditure.

    <p>False</p> Signup and view all the answers

    What is indicated by a demand curve that is a rectangular hyperbola?

    <p>Unit elastic demand</p> Signup and view all the answers

    If price elasticity of demand (Ea) is less than 1, then demand is considered to be __________.

    <p>inelastic</p> Signup and view all the answers

    What effect does an increase in price have on total expenditure when demand is inelastic?

    <p>Total expenditure increases</p> Signup and view all the answers

    Match the following demands with their elasticities:

    <p>Unit elastic = Price elasticity equals 1 Elastic = Price elasticity greater than 1 Inelastic = Price elasticity less than 1 Perfectly elastic = Price elasticity approaches infinity</p> Signup and view all the answers

    Total expenditure is maximized when demand is perfectly elastic.

    <p>False</p> Signup and view all the answers

    What happens to quantity demanded when the price increases under elastic demand?

    <p>Quantity demanded decreases significantly</p> Signup and view all the answers

    What does the Marginal Cost (MC) represent?

    <p>Additional cost of producing one more unit</p> Signup and view all the answers

    The Marginal Cost curve is U-shaped.

    <p>True</p> Signup and view all the answers

    What happens to Average Cost (AC) when Marginal Cost (MC) is equal to AC?

    <p>AC is minimized.</p> Signup and view all the answers

    Explicit costs include costs such as paying for _____, rent, materials, and interest on loans.

    <p>wages</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Marginal Cost = Additional cost of producing an extra unit Average Cost = Total cost divided by the number of units produced Explicit Costs = Direct payments made for resources and inputs Total Variable Cost = Cost that varies with the level of output</p> Signup and view all the answers

    When MC is greater than AC, what happens to AC?

    <p>AC increases</p> Signup and view all the answers

    Total Cost (TC) always increases at a decreasing rate as production increases.

    <p>False</p> Signup and view all the answers

    What occurs when MC is at its minimum?

    <p>Total Cost stops rising at a decreasing rate.</p> Signup and view all the answers

    When the Marginal Cost curve intersects the Average Variable Cost (AVC) curve, it indicates that AVC is at its _____ point.

    <p>minimum</p> Signup and view all the answers

    Which statement is correct regarding the relationship between MC and TVC?

    <p>When MC falls, TVC rises at a decreasing rate</p> Signup and view all the answers

    Study Notes

    Elasticity of Demand

    • Price Elasticity of Demand measures the responsiveness of demand to price changes.
    • Elastic Demand (Ed > 1): Demand is highly responsive to price changes. A small price change leads to a large change in quantity demanded.
    • Inelastic Demand (Ed < 1): Demand is not very responsive to price changes. A significant price change results in a relatively small change in quantity demanded.
    • Unit Elastic Demand (Ed = 1): A change in price leads to an equal percentage change in quantity demanded.

    Factors Affecting Elasticity

    • Nature of a Commodity:
      • Essentials (e.g., water, oxygen): Less elastic demand.
      • Luxuries (e.g., cars, air conditioners): More elastic demand.
    • Number of Close Substitutes:
      • Few substitutes (e.g., petrol): Less elastic demand.
      • Many substitutes (e.g., cold drinks): More elastic demand.
    • Income of the Buyer:
      • Rich: Less elastic demand.
      • Poor: More elastic demand.
    • Number of Uses: A good with many uses will have more elastic demand compared with a good with fewer uses. eg. electricity has many uses.
    • Habit or Addiction: Goods that are habitual or addictive often have inelastic demand (eg. salt and butter)
    • Price of the good itself and the part of overall spending: Expensive goods will often have elastic demand. Goods that amount to small parts of overall expenditure have inelastic demand (eg. buttons).

    Types of Elasticity

    • Unit Elastic: The percentage change in quantity demanded is equal to the percentage change in price.
    • More than Unit Elastic: The percentage change in quantity demanded is greater than the percentage change in price.
    • Less than Unit Elastic: The percentage change in quantity demanded is less than the percentage change in price.

    Calculating Elasticity

    • Percentage Method: Used to measure elasticity.
      • Formula: Ed = (% change in quantity demanded) / (% change in price)

    Production Function

    • Production is the process of converting inputs (factors of production) into outputs (goods or services).
    • Factors of Production:
      • Land
      • Labor
      • Capital
      • Entrepreneurship
    • Time Period:
      • Short run: At least one factor is fixed.
      • Long run: All factors are variable.
    • Production Function: A technical relationship between physical inputs and output ( Qx = f(L, K)), where Qx=output, L=labor and K=capital.

    Types of Increasing Returns

    • Increasing returns at same rates: Input increases at the same rate which also increases the output at the same rate.
    • Increasing returns at increasing rates: Input increases at an increasing rate which also increases the output at an increasing rate.

    TP and MP Curves

    • Total Product (TP): Total physical output produced by a given period of time.
    • Marginal Product (MP): Change in total output when one more unit of input is added
    • Stages of Production:
      • Stage I: TP increases at an increasing rate, MP rises.
      • Stage II: TP increases at a decreasing rate, MP falls, but continues to be positive.
      • Stage III: TP starts falling, MP becomes negative.

    Law of Variable Proportion

    • As we increase the amount of one input while holding the other inputs constant, the marginal product of the variable input will initially rise and then fall.

    Assumptions for the Law of Variable Proportion

    • At least one factor of production is fixed.
    • Technique of production does not change.
    • Short period production function.
    • Factor proportion is variable.
    • Unit of variable factors are equally efficient

    Cost

    • Cost: Money expenditure incurred in production.
    • Total Cost (TC): Total Fixed Cost (TFC) + Total Variable Cost (TVC).
      • Total Fixed Cost (TFC): Costs that do not vary with output in the short run (e.g., rent, interest).
      • Total Variable Cost (TVC): Costs that vary with output in the short run (e.g., raw materials, labor).
    • Cost Function: Functional relationship between cost and output. Cost = f (Q).
    • Average Cost (AC): Total Cost (TC) divided by output (Q)

    Average Product Curves

    • Average Product (AP): Total product (TP) divided by the amount of variable input used.

    • Average Variable Cost (AVC): TVC divided by Q.

    • Average Fixed Cost (AFC): TFC divided by Q.

    • U-shaped Curve: AFC, AVC, and AC have U-shaped curves.

    • MC Curve:

      • Initially falls, reaches a minimum point and then rises.

    Relationship Between Curves

    • Relationship between AC and MC: MC cuts AC at its minimum point.
    • Relationship between AVC and MC: MC cuts AVC at its minimum point.
    • Relationship between TC and MC:
      • When MC falls, TC increases at a decreasing rate.
      • When MC is at minimum, TC stops rising at decreasing rate.
      • When MC rises, TC increases at an increasing rate.
    • Relationship between TVC and MC:
      • When MC falls, TVC rises at a decreasing rate.
      • When MC is at minimum, TVC stops rising at a decreasing rate.
      • When MC rises, TVC increases at an increasing rate.

    Explicit and Implicit Costs

    • Explicit Costs: Payments made to external parties
    • Implicit Costs: The opportunity cost of using resources that belong to a business

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    Related Documents

    Elasticity of Demand PDF

    Description

    This quiz explores key concepts in economics related to production, such as average product (AP), marginal product (MP), and the law of variable proportions. It also delves into elasticity and its relationship to demand and pricing. Test your understanding of these foundational concepts!

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