DEFINITIONS YEAR 2

Question 1

Average product

Answer 1

The quantity of output per unit of factor input i.e. the total product divided by the level of output. ?

Question 2

Law of diminishing marginal returns

Answer 2

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

Question 3

Short run

Answer 3

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 4

Long run

Answer 4

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

Question 5

Fixed costs

Answer 5

Cost that do not vary with level of output

Question 6

Sunk costs

Answer 6

Short run costs that cannot be recovered if the firm closes down

Question 7

Variable costs

Answer 7

Costs that vary with level of output

Question 8

Average cost

Answer 8

Total costs divided by the quantity produced

Question 9

Marginal costs

Answer 9

The cost of producing an additional unit of output

Question 10

Economics of scale

Answer 10

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

Question 11

Diseconomies of scale

Answer 11

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

Question 12

Natural monopoly

Answer 12

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

Question 13

Internal economies of scale

Answer 13

Economies of scale that arise from the expansion of a firm.

Question 14

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

Constant returns to scale

Answer 15

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 16

Economies of scope

Answer 16

Economies arising when average cost falls as a firm increases output across a range of different products.

Question 17

Productive efficiency

Answer 17

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 18

Minimum efficient scale

Answer 18

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

Question 19

Normal profit

Answer 19

Profit that covers the opportunity cost of capital and is just sufficient to keep the firm in the market. (?)

Question 20

Supernormal profit

Answer 20

Profit that exceeds normal profit.

Question 21

Marginal revenue

Answer 21

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

Question 22

X-inefficiency

Answer 22

A situation arising when a firm is not operating as minimum cost, perhaps because of organizational slack.

Question 23

Satisficing

Answer 23

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 maximize them. (?)

Question 24

Corporate social responsibility

Answer 24

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

Question 25

Static efficiency

Answer 25

Efficiency at a particular point in time.

Question 26

Dynamic efficiency

Answer 26

A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run.

Question 27

Allocative efficiency

Answer 27

Achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences.

Question 28

Market structure

Answer 28

The market environment within which firms operate.

Question 29

Perfect competition

Answer 29

A form of market structure that produces allocative and productive efficiency in long run equilibrium.