chapter 3A Flashcards
Firm definition
a business organisation that hires factors of production, combines them in productive process to produce & sell the outputs for profit
Plant (Factory) definition
the geographical location where the actual production is carried out
Industry definition
a group of firms producing g&s of the same nature
Objectives of Firms
traditional :
- profit maximising
alternative :
- market share dominance
- revenue maximisation
- growth maximisation
- profit satisficing objective
- managerial utility maximisation
Profit definition
defference between total revenue & total costs of production
Components of Total Costs
(based on opportunity costs)
implicit costs
opp. cost of using resources owned by the firm
explicit costs
opp. cost of using resources owned by other firms
Components of Total Costs
(based on types factors of production used)
total variable costs
costs that do not vary with the level of output
total fixed costs
costs that vary with the level of output
Types of Profit
- subnormal : profit < 0
- normal : profit = 0
- supernormal : profit > 0
Marginal Revenue (MR) definition
the additional revenue from the sale of one more unit of the g&s produced
Marginal Cost (MC) definition
the additional cost incurred from consuming/producing one more unit of the g&s
Short-Run vs. Long-Run
Production
short-run production
output can only be adjusted by changing the quantities of variable factors
long-run production
output can be adjusted by changing the quantities of all factors
Fixed factor / Input definition
a factor of production whose quantities cannot be changed (irrespective of the level of output)
Variable Factor / Input definition
a factor of production whose quantities cannot be changed (irrespective of the level of output)
Law of Diminishing Marginal Returns
when increasing amounts of a variable factor with a given amount of a fixed factr, there will be a point where each extra unit of the variable factor will produce less extra output than the previous unit
Internal Economies of Scale definition
the reduction in long-run average costs of production / cost advantages as a result of the expansion of the scale of production of a particular output/product for an individual firm
