Definitions Flashcards
Fixed costs
Costs that do not vary with the output eg rent and advertising
Variable costs
Costs that do vary with output eg wages and raw materials
Semi variable costs
Costs that is fixed until a certain level of production is reached after which cost become variable
Marginal cost
How much it costs firms to produce an additional unit of output
Normal profit
A level of profit just enough to cover the opportunity cost of F.O.P being used in their current employment
Economic profit / supernormal profit
Profit over and above normal profit
Explicit costs
Fixed and variable costs actually paid such as rent and raw materials
Production
Process of combining inputs into outputs
Diminishing marginal returns
Adding an additional unit of input of One F.O.P that decreases output
Total physical product
As the number of workers increases so does the output
Marginal physical product
Increase in total physical product for each worker
Marginal return
What is gained by adding an additional unit of one F.O.P
Increasing returns to scale
Increase in quantity of all F.O.P employed leads to more than proportionate increase in output
Constant returns to scale
Increase in quantity of all F.O.P employed leads to a proportionate increase in output
Decreasing returns to scale
Increase in quantity of all F.O.P leads to less than proportionate increase in output
Economies of scale internal and external
Reduction in a firms long - run averages costs due to an increase in the scale of firms operations (internal) or the growth of the industries (external )
Diseconomies of scale internal
Increase in LRAC from an increase in a scales operations
Diseconomies of scale external
Increase in LRAC from an increase in size of an industry
Invention
Discovery of new ideas though R and d , new products
Innovation
New ideas to bring a new product to the market , process of transforming inventions
Process innovation
Finding new ways to produce a product
Creative destruction
Barriers by entry are removed from markets , allowing new firms to replace older ones creating new markets out of nothing
Capitalism
Means of production are controlled by the private sector
Divorce between ownership and control
Firms that are ran by people who don’t own them
Principle - Agent problem
Shareholders appoint an agent (manager) to run the firm but do not act as they wish because they have different incentives
Profit satisficing
Firms aiming to achieve a certain level of profit and is less concerned with achieving any profit beyond this point
Why would a business want to grow ?
To gain market power - may become price setters (monopoly)
Improve brand recognition -demand for products may become price inelastic
Achieve economies of scale
Increase firms profit
Internal / organic growth
Firm purchases new F.O.P
External growth
Either merger or takeover of another business
Takeover
One firm buys another
Merger
Joining of two existing firms
Horizontal
Two firms at same stage of production in the same industry join together e.g Disney and Pixar
Forward vertical
Firm takes over another in the same industry but at later stage of production
Eg dealership / show room to the company Ford
Backward vertical
Firms take over another in the same industry but at an earlier stage of production
Eg metal manufacturer to give to the company Ford
Conglomerate
Two firms with no common Interest come together eg Ford and adidas
Contestable markets
A market free from barriers to entry or exit
Monopoly
Dominant firm at least 25% market share
Barriers to entry
Factors that make it difficult / expensive for firms to enter a market
Barriers to exit
Factors that make it difficult / expensive for firms to leave a market
Costs
Amount of money spent
Revenue
Money gained
Revenue
Money gained
Return
Output produced
Return
Output produced
Accounting profit
Amount of profit which only considers explicit costs (TF and TV costs ) and not opportunity cost (implicit)
Average costs
How much is cost firms to produce one unit of output
