1.5 Theory of the firm

Question 1

Short run

Answer 1

Is the period of time in which one factor of production is fixed. (All production takes place in the short run)

Question 2

Long run

Answer 2

Is the period of time in which all factors of production are variable. (all planning takes place in the long run)

Question 3

Law of diminishing returns

Answer 3

States that as the increased output per additional unit of variable factor will fall. These diminishing returns will always set in if one or more factors of production are fixed.

Question 4

Economic costs

Answer 4

Are estimated by adding explicit cots and implicit costs

Question 5

Explicit Costs

Answer 5

Are cost to a firm that involves the direct payment of money to purchase factors not already owned by the firm.

Question 6

Implicit costs

Answer 6

opportunity costs for the firm if they had employed its factors for another use.

Question 7

Economies of scale

Answer 7

Are a fall in long run average costs that come about when a firm alters its factors of production in order to increase its scale of output, and leads to the firm experiencing increasing returns to scale.

Question 8

Diseconomies of scale

Answer 8

Are an increase in the long run average cots that come about when a firm alters its factors of production in order to increases its scale output, and leads to to the firm experiencing a decrease in returns to scale.

Question 9

Normal profit/ zero economic profit

Answer 9

is the amount of revenue needed to exactly cover all of the economic costs. It is the minimum revenue needed to keep the firm in business.

Question 10

Economic profit/abnormal profit

Answer 10

Is a level of profit that is greater than the required to ensure that a firm will continue to supply its existing product. This occurs when the total revenue is greater than the economic costs.

Question 11

Shut down price

Answer 11

Enables a firm to cover its variable cots in the short-run, and occurs where price equals to the AVC. If the price does not cover the AVC, then the firm will shut down for good.

Question 12

Break-even Price

Answer 12

enables a firm to cover its costs in the long-run, and occurs where price equals ATC, making normal profit. Ig the price does not cover AVC, the firm will shut down for good.

Question 13

Profit maximizing level of output

Answer 13

is the level of output where MR =MC, and MC is rising

Question 14

Satisficing

Answer 14

Refers to acceptance of less than maximum profits in order to pursue other objectives.

Question 15

total Product

Answer 15

total output that a firm produces, using its fixed and variable factors in a fixed time period

Question 16

AP

Answer 16

output that is produced on average, by using each unit of variable factor.

Question 17

MP

Answer 17

Additional output that is produced by using an extra unit of the variable factor.

Question 18

TC

Answer 18

the complete costs of producing output

Question 19

TFC

Answer 19

total costs of fixed assets that a firm uses in a given time period.

Question 20

TVC

Answer 20

total costs of variable assets that a firm uses in a given time period.

Question 21

MC

Answer 21

Increase in total cost of producing an extra unit of output.

Question 22

Increasing returns to scale

Answer 22

Happens when long-run unit cots fall as output increases

Question 23

Constant returns to scale

Answer 23

happens when long-run unit costs are constant as output increases

Question 24

Decreasing returns to scale

Answer 24

Happens when long-run unit costs rise as output increases