Podcast
Questions and Answers
In the short run, what distinguishes a fixed input from a variable input in the context of production?
In the short run, what distinguishes a fixed input from a variable input in the context of production?
- Fixed inputs can be altered quickly, while variable inputs require significant time to change.
- Fixed inputs do not contribute to the final product, while variable inputs do.
- Fixed inputs cannot be changed, while variable inputs can be adjusted as output changes. (correct)
- Fixed inputs are more expensive than variable inputs.
A company manufactures widgets. If they increase all inputs (labor, capital, materials) by 20% and widget output increases by 15%, what is this an example of?
A company manufactures widgets. If they increase all inputs (labor, capital, materials) by 20% and widget output increases by 15%, what is this an example of?
- Increasing returns to scale
- Diminishing marginal returns
- Constant returns to scale
- Decreasing returns to scale (correct)
According to the law of diminishing returns, what happens as additional units of a variable input are added to a fixed input?
According to the law of diminishing returns, what happens as additional units of a variable input are added to a fixed input?
- The total product will decrease.
- The marginal product of the variable input will eventually decrease. (correct)
- The total cost of production decreases indefinitely.
- The average product of the variable input will remain constant.
Which of the following costs for a car manufacturer would most likely be considered a fixed cost in the short run?
Which of the following costs for a car manufacturer would most likely be considered a fixed cost in the short run?
What is the likely consequence of hiring more productive workers for a company?
What is the likely consequence of hiring more productive workers for a company?
How is Total Cost (TC) calculated?
How is Total Cost (TC) calculated?
What does Marginal Cost (MC) measure?
What does Marginal Cost (MC) measure?
If a firm's marginal cost is currently $15, and its average total cost is $20, what can be inferred about the average total cost?
If a firm's marginal cost is currently $15, and its average total cost is $20, what can be inferred about the average total cost?
If a company experiences increasing returns to scale, what does this imply about its long-run average cost (LRAC) curve?
If a company experiences increasing returns to scale, what does this imply about its long-run average cost (LRAC) curve?
Which of the following is a typical reason for diseconomies of scale to occur?
Which of the following is a typical reason for diseconomies of scale to occur?
What does the term 'minimum efficient scale' (MES) refer to?
What does the term 'minimum efficient scale' (MES) refer to?
Which of the following would most likely lead to economies of scale in a manufacturing company?
Which of the following would most likely lead to economies of scale in a manufacturing company?
If a firm is experiencing diseconomies of scale, what strategic decision might help it regain efficiency?
If a firm is experiencing diseconomies of scale, what strategic decision might help it regain efficiency?
Which of the following formulas accurately represents Average Revenue (AR)?
Which of the following formulas accurately represents Average Revenue (AR)?
If a firm doubles its inputs and its output exactly doubles, what type of returns to scale is the firm experiencing?
If a firm doubles its inputs and its output exactly doubles, what type of returns to scale is the firm experiencing?
Which condition defines the term 'Economies of Scope'?
Which condition defines the term 'Economies of Scope'?
What is indicated when a firm's long-run average cost (LRAC) curve is flat or horizontal?
What is indicated when a firm's long-run average cost (LRAC) curve is flat or horizontal?
How does the relationship between marginal revenue (MR) and average revenue (AR) appear for a firm operating in a perfectly competitive market?
How does the relationship between marginal revenue (MR) and average revenue (AR) appear for a firm operating in a perfectly competitive market?
Which of the following is a significant factor differentiating the short run from the long run in economics?
Which of the following is a significant factor differentiating the short run from the long run in economics?
A company discovers that its marginal cost exceeds its average cost. What effect will the production of the next unit have on the average cost?
A company discovers that its marginal cost exceeds its average cost. What effect will the production of the next unit have on the average cost?
For a delivery company, which of the following costs would likely be classified as a variable cost?
For a delivery company, which of the following costs would likely be classified as a variable cost?
Which of the following factors would least likely contribute to diseconomies of scale?
Which of the following factors would least likely contribute to diseconomies of scale?
What is the primary reason why the average fixed cost (AFC) curve always declines as output increases?
What is the primary reason why the average fixed cost (AFC) curve always declines as output increases?
Assume a firm's total revenue is $500, and its total costs are $600. What can be determined from this information?
Assume a firm's total revenue is $500, and its total costs are $600. What can be determined from this information?
What concept explains why a firm's short-run marginal cost curve will eventually increase as output expands, assuming at least one input is fixed?
What concept explains why a firm's short-run marginal cost curve will eventually increase as output expands, assuming at least one input is fixed?
Which of the following is an example of an indivisibility that can create economies of scale?
Which of the following is an example of an indivisibility that can create economies of scale?
How would high labour costs affect a building company?
How would high labour costs affect a building company?
What is the formula for marginal revenue?
What is the formula for marginal revenue?
Flashcards
Fixed Costs
Fixed Costs
Costs that do not change with the level of production.
Variable Costs
Variable Costs
Costs that vary with the level of production.
Short Run
Short Run
The period where at least one input is fixed and cannot be changed.
Long Run
Long Run
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Law of Diminishing Returns
Law of Diminishing Returns
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Average Cost (AC)
Average Cost (AC)
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Marginal Cost (MC)
Marginal Cost (MC)
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Average Fixed Cost (AFC)
Average Fixed Cost (AFC)
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Average Variable Cost (AVC)
Average Variable Cost (AVC)
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Average Cost Formula
Average Cost Formula
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Economies of Scale
Economies of Scale
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Diseconomies of Scale
Diseconomies of Scale
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Constant Returns to Scale
Constant Returns to Scale
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Increasing Returns to Scale
Increasing Returns to Scale
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Total Revenue (TR)
Total Revenue (TR)
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Average Revenue (AR)
Average Revenue (AR)
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Marginal Revenue (MR)
Marginal Revenue (MR)
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Study Notes
- Business problem: How to manage costs?
- Economics solution: Fixed and Variable costs
Learning Objectives
- Short run and Long run need to be distinguished
- The following all need to be understood to manage costs:
- Fixed costs
- Variable costs
- Average, marginal, and total costs
- The Law of diminishing returns
- Economies and diseconomies of scale
- Total Revenue
Short-Run and Long-Run Production
- In the short run and the long run there are fixed and variable inputs
- Short run: at least some inputs are fixed
- Long run: all inputs are variable
Short-Run Production
- Includes the law of diminishing returns
Law of Diminishing Returns
- When one or more inputs are held fixed, there will be a point beyond which the extra output from additional units of the variable input will diminish
Costs and Inputs
- Costs relate to the productivity of factors, for example, hiring more productive workers
- Costs relate to the price of factors, for example, what if labour costs go up if you are a building company?
Costs
- Total Fixed Cost (TFC) for example a classroom
- Total Variable Cost (TVC) relates to the law of diminishing returns
- Total Cost (TC = TFC + TVC)
- Individual cost equation
MC and Diminishing Returns
- Marginal Cost (MC) is how much to produce 1 extra unit of output
- MC = ΔTC / ΔQ
- Marginal cost relates to the law of diminishing returns
Average Cost
- Average Fixed Cost (AFC) = TFC / Q
- Average Variable Cost (AVC) = TVC / Q
- Average Cost (AC) = TC / Q = AFC + AVC
Average and Marginal costs
- An 'x' shows where diminishing marginal returns set in
Average and Marginal Cost Relationship
- The shape of Average Cost (AC) depends on the shape of Marginal Cost (MC)
- If the marginal equals the average, the average will not change
- If the marginal is above the average, the average will rise
- If the marginal is below the average, the average will fall
Long Run
- All inputs are variable in the long run
Scale of Production
- Constant returns to scale: as you scale up you get no cost advantage
- Increasing returns to scale: as you scale up the inputs you are using are becoming more productive
Why do firms scale up?
- Economies of scale advantages:
- Specialisation and division of labour
- Indivisibilities(https://www.youtube.com/watch?v=vK0BjIA6njs)
- Container principle
- Greater efficiency of large machines
- By-products (https://www.youtube.com/watch?v=GqbbBpzY9xI)
- Multi-stage production
- Organisational & administrative economies
- Financial economies
- Economies of scope are possible
Diseconomies of Scale
- Managerial diseconomies such as disconnection with workers
- Effects of workers and industrial relations
- Risks of interdependencies which increases costs
- External economies of scale
- External diseconomies of scale
- Ultimately: economies of scale reaches a certain output and diseconomies of scale kick in when firms are very large
Long-Run Average Cost
- Shape of the LRAC curve depends on whether there are economies or diseconomies of scale
- Assumptions behind the curve:
- Input prices are given
- State of technology and input quality are given
- Firms operate efficiently
Minimum Efficient Scale
- This is the point where Long run average cost (LRAC) levels off:
Revenue
- Total Revenue (TR) = Price (P) × Quantity (Q)
- Average Revenue (AR) = TR / Q
- Marginal Revenue (MR) = ΔTR / ΔQ
- Revenue curves are for firms who are price takers with a horizontal demand curve
- Average revenue (AR)
- Marginal revenue (MR)
Key Terms
- Total costs: Fixed costs + variable costs
- Law of diminishing return applies in the short run
- Consider costs in the short run & long run
- Calculations of:
- Average Cost (AC)
- Marginal Cost (MC)
- Economies of scale in the long run
- Diseconomies of scale
- Total Revenue (TR)
- Average Revenue (AR)
- Marginal Revenue (MR)
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