Economics Long Run vs Short Run Production

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Questions and Answers

What is the primary way a firm can increase output in the short run?

Reduce total costs

Increase the quantity of variable factors of production (correct)

Increase the quantity of fixed resources

Change the plant size

In the long run, what happens to fixed costs?

Remain fixed

Become variable costs (correct)

Decrease as production increases

Increase due to inflation

Which of the following best defines Total Product?

The output gained from fixed inputs only

The total quantity of a good produced in a given period (correct)

The maximum output possible in a given time frame

The quantity of inputs required to produce a good

What does the Marginal Product of Labor (MPL) represent?

Increase in total product from hiring one more worker (C) Signup and view all the answers

What happens to production in the long run?

All factors of production can be varied (A) Signup and view all the answers

How does the production function relate inputs to outputs?

It illustrates the relationship between quantities of inputs used and the quantity of output produced (A) Signup and view all the answers

What does a Total Product Curve illustrate?

The attainable and unattainable output levels given input quantities (A) Signup and view all the answers

Which of the following is NOT a component of production summarized in short run production concepts?

Fixed cost calculations (C) Signup and view all the answers

What is the average product (AP) of labor?

Total product per worker employed (B) Signup and view all the answers

Which scenario illustrates decreasing marginal returns?

Additional workers produce less output than previous workers (B) Signup and view all the answers

How is marginal product of labor (MPL) calculated?

Change in total product divided by quantity of labor (A) Signup and view all the answers

How can average product also be described?

As a measure of productivity per unit of labor (C) Signup and view all the answers

What characterizes increasing marginal returns?

The productivity of each additional worker increases (D) Signup and view all the answers

What happens to marginal returns when too many workers are employed?

They eventually start to decline due to limited resources (A) Signup and view all the answers

Why is productivity important in the context of average product?

It helps in analyzing efficiency in resource allocation (C) Signup and view all the answers

Which statement about the marginal product of labor is true?

MPL can be negative if output decreases (C) Signup and view all the answers

What does the distance between the TC curve and the TVC curve represent?

Total Fixed Cost (TFC) (A) Signup and view all the answers

What happens to average total cost (ATC) when marginal cost (MC) is greater than ATC?

ATC rises (C) Signup and view all the answers

What is indicated when the marginal cost curve crosses the average total cost curve?

Average total cost is at its minimum (B) Signup and view all the answers

According to the marginal-average rule, what occurs when marginal cost is below average cost?

Average cost falls (D) Signup and view all the answers

Which of the following shapes best describes the average total cost curve?

U-shaped curve (B) Signup and view all the answers

If marginal cost (MC) rises with increased output, what does this imply about production?

Diminishing returns to scale are likely (B) Signup and view all the answers

What happens to average variable cost (AVC) when output increases substantially?

AVC begins to rise (C) Signup and view all the answers

Which of the following statements about total fixed cost (TFC) is true?

TFC does not vary with output (C) Signup and view all the answers

What is the formula to calculate profit?

Profit = Total Revenue - Total Cost (D) Signup and view all the answers

Which of the following correctly defines explicit costs?

Input costs that require an outlay of money by the firm (B) Signup and view all the answers

How do economists determine economic profit?

Total Revenue minus total costs including implicit costs (D) Signup and view all the answers

What characterizes accounting profit?

Total Revenue minus only explicit costs (C) Signup and view all the answers

What is the primary goal of a firm?

To maximize profit (D) Signup and view all the answers

What is an example of an implicit cost?

The cost of using a building owned by the firm (D) Signup and view all the answers

If total revenue exceeds explicit costs, what type of profit does a firm earn?

Accounting profit (D) Signup and view all the answers

Which of the following statements is true regarding total cost?

Total Cost includes both explicit and implicit costs (B) Signup and view all the answers

What primarily causes long-run cost curves to differ from short-run cost curves?

Many costs are fixed in the short run but variable in the long run. (A) Signup and view all the answers

Which of the following best describes the long-run average-total cost curve?

It is often referred to as the firm's planning curve. (D) Signup and view all the answers

What is meant by 'economies of scale'?

The long-run average cost curve decreases as the firm increases output. (A) Signup and view all the answers

How is marginal revenue (MR) defined?

It measures the increase in total revenue from selling one additional unit. (A) Signup and view all the answers

In the context of revenue concepts, what formula is used to calculate total revenue (TR)?

TR = Price * Quantity (B) Signup and view all the answers

What characterizes constant returns to scale?

The long-run average cost curve remains unchanged as output increases. (C) Signup and view all the answers

Which condition describes diseconomies of scale?

The long-run average cost curve rises as the firm increases output. (D) Signup and view all the answers

What is the purpose of average revenue (AR) in revenue calculations?

To indicate how much revenue a firm receives for the typical unit sold. (A) Signup and view all the answers

Study Notes

Production Concepts

Fixed resources, including technology and capital, are constants in production, while variable factors like labor can be adjusted in the short run to increase output.
In the long run, firms can vary all resources, leading to changes in plant size.
Cost differentiation exists between fixed and variable costs depending on the time frame; all fixed costs become variable in the long run.

Short Run Production

Total Product (TP): Represents the total quantity of a good produced over a specified period and reflects how output increases with labor.
Production Function: Illustrates the relationship between input quantities and output levels—important for understanding marginal and average products.
Marginal Product of Labor (MPL): Measures the change in total product resulting from hiring an additional worker, calculated as ΔQ/ΔL.
Average Product (AP): Indicates the total product per unit of labor; it is synonymous with productivity and calculated as TP/L.

Marginal Returns

Increasing Marginal Returns: Occurs when MPL of a new worker exceeds that of the previous worker, often stemming from specialization and labor division.
Decreasing Marginal Returns: Happens when MPL of an additional worker is less than that of the last, due to limited resources and workspace efficiency.

Short Run Cost Analysis

Total Fixed Costs (TFC) remain unchanged regardless of output, while Total Cost (TC) is shaped by Total Variable Costs (TVC).
Relationship between Marginal Cost (MC) and Average Total Cost (ATC):
- Average total cost falls when MC is below it and rises when MC surpasses it.
- Minimum points for ATC and AVC occur where they intersect with the MC curve.

Long Run Cost Curves

Long-run average-total-cost (ATC) curve is flatter than the short-run. This reflects the ability of firms to adjust all resources over time.
Economies of Scale: Long-run ATC declines as output increases.
Constant Returns to Scale: Long-run ATC remains unchanged with increased output.
Diseconomies of Scale: Long-run ATC rises as output increases.

Profit Concepts

Profit Calculation: Profit equals total revenue (TR) minus total cost (TC).
Economic Profit: Total revenue minus both explicit and implicit costs.
Accounting Profit: Total revenue minus only explicit costs.

Cost Types

Explicit Costs: Cash payments made for inputs, e.g. wages and rent.
Implicit Costs: Opportunity costs of resources owned by the firm, e.g., the earnings foregone by using owned resources.

Revenue Concepts

Total Revenue (TR): The income received from sales, calculated as TR = Price × Quantity.
Marginal Revenue (MR): The revenue increase from one additional unit produced, calculated as ΔTR/ΔQ.
Average Revenue (AR): Average revenue received per unit sold, computed as TR/Quantity sold.

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Description

This quiz explores the concepts of fixed and variable resources in production. Understand how firms can adjust their input in the short run and long run to maximize output efficiently. Test your knowledge about factors of production and cost structures in economics.