| What 3 types of economies of scale are there? | 1. Economies of scale: LRAC decrease as q increase
2. Dis-economies of scale: LRAC increase as q increase
3. Constant returns to scale: LRAC increase equally as q increase |
| What 3 types of economies of scale are there? | 1. Economies of scale: LRAC decrease as q increase
2. Dis-economies of scale: LRAC increase as q increase
3. Constant returns to scale: LRAC increase equally as q increase |
| What does the long run production function look like, and what is the description of each variable? | Long run production function: q=f(L,K)
q = quantity, L = labor & K = kapital. Both are variable in the long run, and the function of L and K creates quantity of products produced. |
| What does the short run production function look like, and what is the description of each variable? | Short run production function: q=f(L,K ̅ )=g(L)
In the short run, 1 or more production factors are fixed. Here, there is a bar over K so capital is fixed. Hence, q is a function of L. Both L and K can be fixed. |
| What is MPL | Marginal product of labor: Additional quantity of output produced from employing each additional unit of labor. |
| What is APL | Average product of labor: Ratio of total output to quantity of labor employed. |
| Is the law of diminishing returns a short run or long run concept? Elaborate your answer. | Holding capital (labor) fixed, the extra output produced from each successive unit of labor (capital) eventually declines. It is short run because either K or L is fixed. |
| What is the difference between law of diminishing returns and returns to scale? | Law of diminishing returns says, holding either K or L fixed, that increasing the non fixed production variable with 1 will lead to a decreasing output.
Returns to scale is a contribution of all input factors to firm’s output when all input factors are variable. RTS govern the relationship between output and all inputs.
LODR is a short run concept as one production factor is held fixed.
RTS is a long run concept as both capital and labor is variable. |
| What are the 3 types of return according to returns to scale? | 1. Increasing returns (economies of scale): output increases more than proportionately to the increase in all inputs
2. Constant returns: output increases proportionately with an increase in all inputs
3. Decreasing returns (diseconomies of scale): output increases less than proportionately to the increase in all inputs |
| What is total costs and how is it calculated? | Total cost (TC) = Variable costs + fixed costs |
| What is variable costs and how is it calculated? | Variable cost (VC) = Costs associated with inputs that can be variable depending on level of output. Should be traceable directly to the cost object (product produced). |
| What is an average variable cost and how is it calculated? | Average variable cost (AVC) = VC/Q |
| What is a fixed cost? | Fixed cost (FC) = Costs associated with fixed inputs used in production and do not vary with output. |
| What is average fixed cost and how is it calculated? | Average fixed cost (AFC) = FC/Q |
| What is short run average cost and how is it calculated? | Short run average cost (SRAC) = TC/Q = AFC + AVC |
| What is short run marginal cost and how is it calculated? | Short run marginal cost (SRMC) = ΔTC/ΔQ=ΔVC/ΔQ |
| What is long run average cost? | Long-run average cost (LRAC): lowest cost of producing one unit of output by varying all inputs (here: both labor and capital) |
| What is long-run marginal cost? | Long-run marginal cost (LRMC): marginal cost of producing an additional unit of output by varying all inputs (here: both labor and capital) |
| What is economies of scale? | Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable. |
| How can we use LRAC and LRMC to judge the economies of scale for a firm? | LRMC < LRAC: LRAC decreasing, hence economies of scale
LRMC > LRAC: LRAC increasing, hence dis-economies of scale
LRMC = LRAC: LRAC at its minimum, constant returns to scale |
| What 3 types of economies of scale are there? | 1. Economies of scale: LRAC decrease as q increase
2. Dis-economies of scale: LRAC increase as q increase
3. Constant returns to scale: LRAC increase equally as q increase |
| What is economies of scope | Economies of scope: cost savings that arise when a firm produces two or more outputs using the same set of inputs. |
| What is minimum efficient scale (MES) | Minimum efficient scale (MES): all economies of scale are exhausted and the firm experiences constant returns to scale. A firm is most efficient working at this level as they use all savings of economies of scale. |
