DEFINITIONS YEAR 2 Flashcards
Average product
The quantity of output per unit of factor input i.e. the total product divided by the level of output. ?
Law of diminishing marginal returns
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.
Short run
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
Long run
The period over which the firm is able to vary the inputs of all its factors of production.
Fixed costs
Cost that do not vary with level of output
Sunk costs
Short run costs that cannot be recovered if the firm closes down
Variable costs
Costs that vary with level of output
Average cost
Total costs divided by the quantity produced
Marginal costs
The cost of producing an additional unit of output
Economics of scale
Occur for a firm when an increased in a firm’s scale of production leads to production at a lower long-run average cost.
Diseconomies of scale
Occur for a firm when an increase in the scale of production leads to higher long run average costs.
Natural monopoly
A monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable.
Internal economies of scale
Economies of scale that arise from the expansion of a firm.
External economies of scale
Economies of scale that arise from the expansion of the industry in which a firm is operating.
Constant returns to scale
Found when long-run average cost remains constant with an increase in output i.e. when output and costs rise at the same rate.
Economies of scope
Economies arising when average cost falls as a firm increases output across a range of different products.
Productive efficiency
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.
Minimum efficient scale
The level of output at which long-run average cost stops falling as output increases.
Normal profit
Profit that covers the opportunity cost of capital and is just sufficient to keep the firm in the market. (?)
Supernormal profit
Profit that exceeds normal profit.
Marginal revenue
The additional revenue gained by a firm from selling an additional unit of output.
X-inefficiency
A situation arising when a firm is not operating as minimum cost, perhaps because of organizational slack.
Satisficing
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. (?)
Corporate social responsibility
Actions that a firm takes in order to demonstrate its commitment to behaving in the public interest.
Static efficiency
Efficiency at a particular point in time.
Dynamic efficiency
A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run.
Allocative efficiency
Achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences.
Market structure
The market environment within which firms operate.
Perfect competition
A form of market structure that produces allocative and productive efficiency in long run equilibrium.
