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Costs of Production

QuestionAnswer
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