chapter 6 - The Firm Flashcards
what are the roles of a firm in an economy
- to facilitate specialisation- specialisation will lead to a greater overall output in an economy as people can become more efficient at certain tasks and employ others to do tasks needed. A clothes manufacturer may employ accountants or marketing agencies for advertising and use wholesalers or agents to sell their goods, so that they can focus on improving their products, leading to more overall output
- to provide choice- consumers preferences vary so having competing firms increases the likelihood of innovation and a greater range of products being sold to satisfy varying tastes in the market.
- to create employment- firms provide jobs and wages to the consumer who then have disposable income to spend on goods and services as they wish
what is a fixed cost
they are costs that remain the same irrespective of the level of output.
eg rent, loan repayments, commercial rates …
whether i produce 10 units or 10000 units, my fixed costs remain constant at a price.
what is a variable cost
they are the costs that change as output changes. they increase as output increases
eg electricity costs, input costs (raw materials, labour)
ar 0 output, variable costs are 0 but fixed costs would still be charged
what is marginal cost
is the addition/increase in total cost from the production of an extra unit of output
what is average cost
is total cost divided by the total number of units produced/ it is the cost per unit of output produced
what are total costs
these are the entire cost of production faced by the firm (TC=FC+VC)
total costs don’t start at zero they include fixed costs which are paid irrespective of quantity produced
what is the short run
the short run (SR) is a period of time where at least one factor of production is held constant or fixed. the factor of production that takes the longest time to change is usually fixed capital
eg premises, buildings, machines etc
what is the long run
the long run (LR) is a period of time long enough for all factors of production to be variable. in the long run every factor of production is variable- the size of the factory, the number of machines etc. therefore there are no fixed costs in the long run
what are normal profits
where AR = AC
it is the minimum amount of profit which the entrepreneur needs to earn to keep resources in their present use in the long run. normal profit is a fixed cost making up part of the total cost of production. it is covered when the average revenue received from selling goods is equal to the average cost of production
what are supernormal profits
where AR>AC
it is the profit earned in excess of normal profit/ is the profit over and above the minimum required to keep factors of production in their current use. it occurs whenever the average revenue received from selling goods is greater than the average costs associated with production
what is the law of diminishing marginal returns
as more of a variable factor of production are added to other (constant) fixed factors of production, the returns to the variable factor will eventually fall.
what is explicit cost ?
(the known costs/the money costs). the costs a firm pays for inputs(recorded by accountants). they require a cash outlay by the firm.
what is implicit cost ?
the implicit costs are often non monetary costs and are often difficult to quantify/ firm uses the resources it owns. inputs not purchased in the market transaction.( the owners time and investment in the firm eg the wages the owner does not take for his/her effort)
what is the marginal cost ?
is the addition/increase in total cost from the production of an extra unit of output.
what is the average cost ?
it is the total cost divided by the total number of units produced/ it is the cost per unit of output produced.
