2281 · 3.6
Firms and production flashcards
Revision flashcards for Cambridge 2281 Firms and production (syllabus 3.6). Flip, recall, then mark a real past-paper question.
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Fixed vs variable costs?
Fixed costs (FC) do not change with output (e.g. rent). Variable costs (VC) change with output (e.g. raw materials). TC = TFC + TVC.
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How to calculate AC and MC?
AC = TC/Q. MC = ΔTC/ΔQ — the cost of producing one more unit.
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Why is MC U-shaped?
Initially falls due to increasing returns/diminishing MC; eventually rises due to diminishing marginal returns in the short run.
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Profit-maximising rule?
Produce where MC = MR. If MR > MC, producing more adds to profit; if MR < MC, producing less raises profit.
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MR in perfect competition?
MR = AR = P — the firm is a price taker and can sell any quantity at the market price.
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Economies vs diseconomies of scale?
Economies: LRAC falls as output rises (bulk buying, specialisation). Diseconomies: LRAC rises (management inefficiency, communication problems).
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What is the Law of Diminishing Marginal Returns?
A short-run concept stating that as successive units of a variable factor are added to a fixed factor, the marginal product of the variable factor will eventually decrease. This leads to an increase in marginal cost.
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What is the profit-maximising rule for a firm?
A firm maximises profit by producing at the level of output where Marginal Cost (MC) equals Marginal Revenue (MR). This is because for every unit produced up to this point, MR > MC, adding to total profit.
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Define 'Normal Profit'.
Normal profit is the minimum level of profit required to keep the factors of production in their current use in the long run. It occurs when Total Revenue equals Total Cost (TR = TC), or Average Revenue equals Average Cost (AR = AC). It is considered a cost of production.
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What is the short-run shut-down condition?
A firm should cease production in the short run if the price (Average Revenue) it receives is less than its Average Variable Cost (P < AVC). At this point, it cannot even cover its variable costs per unit, and losses are minimised by shutting down.
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What are 'Economies of Scale'?
These occur in the long run when an increase in the scale of production leads to a fall in long-run average costs (LRAC). Examples include technical, financial, and bulk-buying economies.