Market Structures

• What is the easiest factor of production to vary

  Labour
• How many time periods are there for firms

  3
• The 3 time periods for a firm is the short run, the long run, and then very long run
• The short run is the period of time where one or more factors of production is fixed. The factor is usually an element of capital or land
• The long run is the period in which all factors of production can be varied, within the confines of given technology
• The very long run is the period of time in which all factors of production and technology can be varied
• Is the short run, long run, and very long run the same period of time within small and large firms?

  No
• Is the short run, long run, and very long run a specific length of time?

  No
• What is productivity measured by

  Output per head
• Define total product (TP)

  The total quantity of output produced by a given number of inputs within a particular time period
• Define average product (AP)

  The quantity of output per unit of input
• Define marginal product (MP)

  The addition to output produced by an extra unit of input
• How do you calculate average product (AP)

  (Total product)/(Quantity of inputs)
• How do you calculate marginal product (MP)

  (Change in total product)/(Change in the quantity of inputs)
• Where is marginal product plotted

  At the midpoints
• Law of Diminishing Returns

  Also known as the Law of Variable Proportions
• Law of Diminishing Returns

  1. Increasing quantities of a variable factor of production (usually labour) are used in combination with a fixed factor of production (usually capital)

  2. Initially the average and marginal product will rise

  3. Eventually the marginal product and then the average product will decline
• Law of Diminishing Returns

  • Initial increase in productivity occurs due to the use of specialisation
  • Eventual decline in productivity occurs due to overcrowding of the fixed factor of production
• When does total product (TP) peak

  When marginal product = 0
• When does marginal product intersect average product

  At the max point of average product
• Why does TP, AP and MP all eventually decline?

  The Law of Diminishing Returns
• What happens to MP when TP falls

  It becomes negative
• Why does the MP curve intersect the AP curve at its max point?

  The mathematical relationship between the marginal and the average
• When will the AP curve always slope upwards

  As long as the MP product curve is above it (irrespective of whether MP is rising or falling)
• What happens when the MP curve is below the AP curve

  The AP will be pulled down (the addition to output is less than the average)
• Does diminishing marginal returns happen before or after diminishing average returns

  Before
• What is a fixed cost (FC)

  Costs that do not vary with output
• What are variable costs (VC)

  Costs that vary directly with output
• What is total cost

  Fixed costs + Variable costs
• What is the difference between a salary and wages

  A salary is fixed, while wages are based on working hours
• Examples of fixed costs are rent, salary, and insurance
• Examples of variable costs are raw materials and wages