Key terms - Organising production Flashcards
Command system
A method of organising production that uses a managerial hierarchy.
Economic depreciation
The fall in the market value of a firm’s capital over a given period.
Economic efficiency
Occurs when the firm produces a given output at least cost.
Economic profit
Is equal to total revenue minus total cost (total cost = opportunity cost of production).
Economies of scale
When the cost of producing a unit of a good falls as its output rate increases.
Economies of scope
Experienced by a firm when it uses it specialised and often expensive resources to produce a range of goods and services.
Firm
An institution that hires factors of production and organises those factors to produce and sell goods and services.
Five-firm concentration ratio
The percentage of total revenue/the value of sales in an industry accounted for by the five firms with the largest value of sales.
Implicit rental rate
The firm’s opportunity cost of using the capital it owns. Has two dimensions: economic depreciation and forgone interest.
Incentive system
A method of organising production that uses a market-like mechanism inside the firm. Instead of issuing commands, managers create compensation schemes that induce workers to perform in ways that maximise the firm’s profit.
Normal profit
The return that an entrepreneur can expect to receive on average - the cost of entrepreneurship and an opportunity cost of production.
Principal-agent problem
The problem of devising compensation rules that induce an agent to act in the best interest of a principal.
Technological efficiency
Occurs when the firm produces a given output by using the least amount of inputs.
Technology
Any method of producing a good or service.
