CCEA A Level Economics
CCEA A Level Economics A2 1 Short Run versus Long Run Exam Questions
Free CCEA A Level Economics revision for A2 1 Short Run versus Long Run: what you need to know, common mistakes and exam-style questions with answers. Covers costs, revenue, profit maximisation, shutdown and breakeven, economies of scale, efficiency and normal and supernormal profit.
Practise A2 1 Short Run versus Long Run with past papers
Once you have learnt this topic, find the A2 1 Short Run versus Long Run questions in real CCEA A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CCEA A Level Economics A2 1 Short Run versus Long Run
This topic opens Unit A2 1: Business Economics and provides the theory of the firm used in every market structure. You need to distinguish the short run from the long run, and analyse fixed, variable, total, average and marginal costs, and total, average and marginal revenue. You then use the profit-maximising rule MC = MR, identify shutdown and breakeven points, and explain economies and diseconomies of scale and the long-run average cost curve, including minimum efficient scale. You also need normal and supernormal profit and the different types of efficiency: allocative, productive, dynamic and X-efficiency. CCEA papers expect accurate cost and revenue diagrams and calculations from data tables.
What you need to know
- Short run and long run In the short run at least one factor is fixed and the law of diminishing marginal returns applies. In the long run all factors are variable.
- Costs TC = TFC + TVC; AC = TC/Q; MC is the change in total cost from producing one more unit. MC cuts AVC and AC at their minimum points.
- Revenue and profit TR = P x Q, AR = TR/Q (the demand curve), MR is the change in TR from one more unit. Profit is maximised where MC = MR (with MC rising). Normal profit is the minimum to keep a firm in the industry (included in costs); supernormal profit is profit above this.
- Shutdown and breakeven In the short run a firm continues if price covers average variable cost; it shuts down if P is below AVC. Breakeven is where price equals average total cost.
- Economies of scale Falling long-run average costs as output rises: technical, purchasing, managerial, financial, marketing and risk-bearing. Diseconomies come from coordination, communication and motivation problems. Minimum efficient scale is the lowest output at which LRAC is minimised.
- Efficiency Productive efficiency: P at minimum AC (MC = AC). Allocative efficiency: P = MC. Dynamic efficiency: improvements over time through investment and innovation. X-inefficiency: costs above the lowest possible level due to slack.
Common mistakes in A2 1 Short Run versus Long Run
- Placing the profit-maximising output where profit per unit is highest; it is where MC = MR.
- Drawing MC crossing AC at a point other than the minimum of AC.
- Saying a firm should shut down whenever it makes a loss; in the short run it continues if price covers AVC.
- Confusing internal economies of scale with external economies that benefit the whole industry.
- Mixing up allocative (P = MC) and productive (minimum AC) efficiency.
Try three A2 1 Short Run versus Long Run exam-style questions
1. A firm's total cost rises from £1200 to £1260 when output rises from 100 to 110 units. Calculate the marginal cost per unit and the average cost at 110 units. (3 marks)
Show the mark scheme answer
MC = (1260 - 1200)/(110 - 100) = £6 per unit; AC = 1260/110; = £11.45.
2. Explain why a firm may continue producing in the short run even when it is making a loss. (4 marks)
Show the mark scheme answer
Fixed costs must be paid whether or not it produces; if price covers average variable cost; any revenue above AVC contributes to fixed costs; so the loss is smaller than if it shut down; in the long run it must cover average total cost.
3. Explain two economies of scale a large supermarket chain may enjoy. (4 marks)
Show the mark scheme answer
Purchasing economies: bulk buying from suppliers at lower unit prices; financial economies: borrowing at lower interest rates as it is seen as lower risk; (or) marketing economies spreading advertising costs over more output; reducing long-run average cost.
A2 1 Short Run versus Long Run FAQs
What does CCEA A Level Economics A2 1 Short Run versus Long Run cover?
Short and long run costs and revenues, profit maximisation, shutdown and breakeven points, economies and diseconomies of scale, minimum efficient scale, normal and supernormal profit, and types of efficiency.
Which unit is this topic examined in?
It is in Unit A2 1: Business Economics, a 2 hour paper with short-answer questions, a case study and an open response question chosen from two.
Which conditions should I memorise?
Profit maximisation MC = MR; allocative efficiency P = MC; productive efficiency at minimum AC; short-run shutdown when P is below AVC; long-run exit when P is below AC.
