Chapter 11: Cost, economies of scale, revenue and profit

Question 1

Define firm (business)

Answer 1

An organisation that produces output (a good or a service)

Question 2

Define short run

Answer 2

The period in which at least one factor of production is fixed in supply

Question 3

Define long run

Answer 3

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

Question 4

Define law of diminishing returns

Answer 4

A law stating that if a firm increases its inputs of one factor of production while holding inputs of other factors fixed, eventually the firm will get diminishing marginal returns from the variable factor

Question 5

Define marginal physical product of labour (MPP)

Answer 5

The additional quantity of output produced by an additional unit of labour input

Question 6

Define total cost

Answer 6

The sum of all costs that are incurred in producing a given level of output (including opportunity cost)

Question 7

Define average cost

Answer 7

Total cost divided by the quantity produced sometimes known as unit cost

Question 8

Define marginal cost

Answer 8

The cost of producing a additional unit of output

Question 9

Define fixed costs

Answer 9

Costs that do not vary with the level of output

Question 10

Define variable costs

Answer 10

Costs that do vary with the level of output

Question 11

Define sunk costs

Answer 11

Costs incurred by a firm that cannot be recovered if the firm ceases trading

Question 12

Define economies of scale

Answer 12

Occur for a firm when an increase in the scale of production leads to production at lower long-run average cost

Question 13

Define internal economies of scale

Answer 13

Economies of scale that arise from the expansion of a firm

Question 14

Define external economies of scale

Answer 14

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

Question 15

Define diseconomies of scale

Answer 15

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

Question 16

Define minimum efficient scale

Answer 16

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

Question 17

Define total revenue

Answer 17

The revenue received by a firm from its sales of a good or service - it is the quantity sold, multiplied by the price

Question 18

Define average revenue

Answer 18

The average revenue received by the firm per unit of output - it is total revenue divided by the quantity sold

Question 19

Define marginal revenue

Answer 19

The additional revenue received by the firm if it sells an additional unit of output

Question 20

Define normal profit

Answer 20

The return needed for a firm to stay in a market in the long run

Question 21

Define supernormal profit

Answer 21

Profit above normal profits - also known as abnormal or economic profit

Question 22

Define accounting profit

Answer 22

Profit made by a business based on explicit costs incurred but excluding opportunity cost

Question 23

Define shut-down price

Answer 23

The price below which a firm will choose to exit the market because it is not able to cover its fixed costs