3.2/3.3 Business objectives/Revenue costs and profits

Question 1

what is short run?

Answer 1

the period over which a firm is free to vary the input of one of
its factors of production
(labour), but faces a fixed
input of the other (capital)

Question 2

what is long run?

Answer 2

the period over
which the firm is able to
vary the inputs of all its
factors of production

Question 3

what is the law of diminishing marginal productivity?

Answer 3

law stating that if a firm increases its inputs of one factor of production while holding inputs of the other factor(s) fixed, it will eventually derive
diminishing marginal productivity of the variable factor

Question 4

what are total fixed costs?

Answer 4

costs that do not vary with the level of output

Question 5

what are sunk costs?

Answer 5

short-run costs that cannot be recovered if the firm closes down

Question 6

what are total variable costs?

Answer 6

the sum of costs that vary with
the level of output

Question 7

what is average total cost?

Answer 7

total cost divided by the quantity produced

Question 8

what is the marginal cost?

Answer 8

the cost of producing an additional
unit of output

Question 9

what are economies of scale?

Answer 9

occur for a firm when an increase in a firm’s scale of production leads to
production at lower long-run average cost

Question 10

what is a natural monopoly?

Answer 10

monopoly that arises in an industry in which there are such substantial
economies of scale that only one firm is viable

Question 11

what are management economies of scale?

Answer 11

economies of scale that arise when
a larger firm is able to rationalise its management structure or improve the
cost-effectiveness of its
marketing

Question 12

what are diseconomies of scale?

Answer 12

occur for a firm when an
increase in the scale of production leads to higher long-run average costs

Question 13

what are financial economies of scale?

Answer 13

economies of scale that arise when a larger firm is able to get better
terms on its borrowing because of its size

Question 14

what are purchasing economies of scale?

Answer 14

economies of scale that arise when a larger firm can obtain better
terms from its suppliers

Question 15

technical economies of scale?

Answer 15

economies of scale that arise when increasing size allows improved
technical efficiency

Question 16

what are constant returns to scale?

Answer 16

found when long-run average cost remains constant with an increase
in output, i.e. when output and costs rise at the same rate

Question 17

what are internal economies of scale?

Answer 17

economies of scale that arise from the
expansion of a firm

Question 18

what are external economies of scale?

Answer 18

economies of scale that arise from the
expansion of the industry in which a firm is operating

Question 19

what is productive efficiency?

Answer 19

occurs when firms have chosen appropriate combinations of factors of
production and produce the maximum output possible from those inputs,
thus producing at minimum long-run average cost

Question 20

what is minimum efficient scale?

Answer 20

the level of output at which
long-run average cost stops falling as output increases

Question 21

what is normal profit?

Answer 21

profit that covers the opportunity
cost of capital and is just sufficient to keep the firm in the market

Question 22

what is supernormal profits/abnormal profits/economic profit ?

Answer 22

terms referring to profits that exceed normal profit

Question 23

what is marginal revenue?

Answer 23

the additional revenue gained
by a firm from selling an additional unit of output

Question 24

what is the shutdown point?

Answer 24

the point below which a firm will
cease production in the short run, as its price is not covering its variable costs

Question 25

what is satisficing?

Answer 25

behaviour under which the managers
of firms aim to produce satisfactory results for the firm, e.g. in terms of
profits, rather than trying to maximise them

Question 26

what is bounded rationality?

Answer 26

a situation in which a firm’s
ability to take rational decisions is limited by a lack of information or
an inability to interpret the information that is available

Question 27

what is corporate social responsibility?

Answer 27

actions that a firm takes in
order to demonstrate its commitment to behaving in the public interest