Answer to Question #97879 in Microeconomics for Usman Tariq

Question

Difference between marginal product and marginal cost?

Understand a firms decision to operate or shut down and develop this understanding to explain how supply is linked to marginal cost at prices above average variable cost?

Understand the factors that will cause supply to increase?

Explain the concept of price elasticity of supply and understand how the degree of elasticity is linked to firms abilities to respond to price increases?

Understand the concept of economies of scale and why it may exist?

Explain the concept of minimum efficient scale and understand the importance of operating at the minimum efficient scale?

Explain, using reference to fixed costs, why budget airlines sell at low prices?

Answer 1

1 Difference between marginal product and marginal cost

MP is the additional production of extra workers. MP and MC have inverse relationship. When MP increases, MC decrease. When MP decreases, MC increase.

2  firms decision to operate or shut down and how supply is linked to marginal cost at prices above average variable cost

If the firms total revenue is exceeding the total operating cost or TVC, firm should continue the operations. If TR is lower than SAVC the firm should shut down its operations.

The supply means how much the firm is going to produce at each price. In the short run firm’s supply curve is the MC curve which is prices above the AVC.

3 factors that will cause supply to increase

•     Increase the product price in the market
•   Decrease the factor cost (land, labour, capital and entrepreneurship)
•   Increase the number of firms in the industry
•   Increase the supply of related goods
•  Technological improvement decrease the cost of production
•  Government involvement.

4.      concept of price elasticity of supply and how the degree of elasticity is linked to firms abilities to respond to price increases

Price elasticity of supply is the relative changes occur of the quantity of supply of a good due to the relative change of price of the particular good or service in the given time of period while all the other factors remaining constant.

• Perfect inelastic supply: if there is a change of price , supply will not change.
• Relatively inelastic supply: the percentage of changes of quantity of supply is lower than the percentage of changes in price.
• Unitary elastic supply: percentage of  changes in the price and percentage of changes  in the quantity of supply is equal.
• Relatively elastic supply: percentage of change of the quantity of supply is greater than the percentage of change of price.
•  Perfect elasticity supply: percentage of change of quantity of supply is much larger while price is remaining constant.

5.      concept of economies of scale

economies of scale is the cost advantage received by the firm while it increases its production. When the production is increased the cost will decrease.

It represent the competitive advantage and cost saving of the firm. economies of scale exist when a firm increase its inputs decrease the average cost I the long run. It is more beneficial when firm is larger than small.

6.      concept of minimum efficient scale and importance of operating at the minimum efficient scale

The minimum production output that a firm can achieve with a minimum of long term average costs.  It is the lowest output that a firm can produce when t the AC are minimised in the future.

•        It is the dis economies of the small firms.
•        When the scale of production growth, it is more profitable and achieve growing economies of scale
•      Larger the firm can experience minimum efficient scale

7.      fixed costs

A firm capital on fixed assets on short run such as building, equipment and machinery. The FC is must at the zero production. In the long run FC will become a variable cost.

why budget airlines sell at low prices?

•       Reducing unnecessary requirements(foods, first class, luggage)
•      Use certain number of small plains
•     Low cost on employees
•     Short distance
•     Conduct operations online. (also online ticketing)

References : https://romanroams.com/en/secrets-low-cost-airlines/