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What is the short run?
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What is the long run?
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Costs of Production
| Question | Answer |
|---|---|
| What is the short run? | A period of time during which at least one factor of production is fixed |
| What is the long run? | A period of time during which all factors of production are variable |
| What is an explicit cost? | A cost incurred by a firm when it pays money for something |
| What is an implicit cost? | The opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. |
| What is a fixed cost? | A cost which does not change with output |
| What is a variable cost? | A cost which changes with output |
| What should all companies do in the short term? | Cover their fixed costs |
| What does the law of diminishing marginal returns say? | As more of a variable factor is added to a fixed factor a point will be reached at which the use of one additional unit of a variable factor will cause an increase in output less than that of the previous unit used |
| Define average cost | The average cost to produce one unit of a good |
| What is normal profit? | The return that sufficiently rewards the risk taking of an entrepreneur |
| What is a marginal cost? | The cost of producing one extra unit |
| What causes the short run average cost curve to slope downwards? | Specialisation of labour & Greater spread of fixed costs |
| What causes the short run average cost curve to slope upwards? | The law of diminishing marginal returns |
| How is the long run average cost curve drawn? | By joining the minimum point of all the short run average cost curves |
| Name 9 internal economies of scale | Use of machinery, division of labour, construction savings, purchasing economies, shipping economies, financial economies, marketing economies, management economies, 24 hour production. |
| Name 6 external economies of scale | Better infrastructure, specialist service firms, R&D units, Subsidiary trades, availability of training courses, supports from public bodies. |
| Define internal economy of scale | Forces within a firm that cause the average cost of a firm to decline as it grows in size |
| Define external economy of scale | Forces outside a firm that cause the average cost of a firm to decline as it grows in size |
| Define internal diseconomies of scale | Forces within a firm that cause the average cost of a firm to increase as it grows in size |
| Define external diseconomies of scale | Forces outside a firm that cause the average cost of a firm to increase as it grows in size |
| Name 5 internal diseconomies of scale | Poor decision making, fall in morale, communication problems, control issues, increase in admin costs |
| Name 3 external diseconomies of scale | Shortages of factors of production, raw material shortage, infrastructural problems |
| Define returns to scale | The rate at which outputs increase in relation to inputs |
| Give six reasons small businesses survive in Ireland | Small market size, consumer loyalty, personal services, traditional markets, nature of the good, membership of groups |
| Name four benefits of small scale enterprises | Quicker decision making, high output per head, fewer HR problems, lower overheads. |
| What is a social cost? | A cost that society has to pay due to the existence of a product |
| What is an external economy of consumption? | When a consumer undertakes an action which benefits a third party for which they are not compensated |
| What is an external diseconomy of consumption? | When an action undertaken by a consumer which imposes a cost on a third for which they are not compensated |
| What is an internal economy of production? | When a producer carries out an activity which benefits a third party for which they are not compensated |
| What is an internal diseconomy of production? | When a producer carries out an activity which imposes a cost on a third party for which they are not compensated |
| Define average revenue | Total revenue divided by quantity |
| What is marginal revenue? | The additional revenue earned by selling an additional unit of a product |
| When should a company produce? | When marginal cost equals marginal revenue and marginal cost is rising |
| What condition must be satisfied if a firm is to survive in the long run? | Average revenue must at least equal average cost |
Created by:
JackEatonK98
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