Microeconomics 3.2 Costs and Revenue

Question 1

Short run

Answer 1

period of time when at least one factor of production is fixed in supply.

Question 2

Long run

Answer 2

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

Question 3

Law of diminishing returns

Answer 3

when the firm increases the input from one factor while other factors remain fixed, eventually the return on the increased factor will reduce.

Question 4

Marginal physical product of labour (MPP)L

Answer 4

The additional quantity of output produced by an additional unit of labour.

Question 5

Total cost

Answer 5

The sum of all costs incurred in producing a given level of output.

Question 6

Average Cost

Answer 6

Total cost divided by quantity (unit cost)

Question 7

Marginal cost

Answer 7

The cost of producing an additional unit of output.

Question 8

Fixed costs

Answer 8

Costs that do not vary with the level of output e.g. rent, management salaries

Question 9

Variable costs

Answer 9

Costs that do vary with the level of output e.g. labour, raw materials, energy

Question 10

Sunk costs

Answer 10

Costs which will not be recovered if a firm stops trading.

Question 11

Economies of scale

Answer 11

When a firm increases the scale of production and this leads to lowers long-run average costs.

Question 12

Technical economies of scale

Answer 12

Larger scale capital goods e.g. container ship of combined harvester.

Question 13

Marketing economies of scale

Answer 13

Fixed cost of advertising and marketing will be spread over larger number of units.

Question 14

Management economies of scale

Answer 14

The costs of management can be spread over larger number of units or more specialist staff can be employed in accounting, human resources etc.

Question 15

Financial economies of scale

Answer 15

Larger firms can borrow money at lower rates of interest.

Question 16

Purchasing economies of scale

Answer 16

Bulk buying raw materials can lead to a lower price.

Question 17

External economies of scale

Answer 17

Economies of scale which arise from the expansion of the industry in which a firm is operating.

Question 18

Internal economies of scale

Answer 18

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

Question 19

Technology and skills external economies of scale

Answer 19

Skilling of a pool of labour through a local college e.g. Burnley College to local businesses in Burnley.

Question 20

Economies of scope

Answer 20

Economies of scale to large firms who provide a range of products e.g. Nestle

Question 21

Diseconomies of scale

Answer 21

When a firm’s increased scale of production leads to higher long-run average costs.

Question 22

Concentration economies of scale

Answer 22

Where a firm is located close to other firms in the same industry.

Question 23

Communication diseconomies of scale

Answer 23

It becomes more difficult to communicate across the organisation.

Question 24

Co-ordination diseconomies of scale

Answer 24

Becomes more difficult to co-ordinate production across a range of factories or countries.

Question 25

Motivational diseconomies of scale

Answer 25

Managers become demotivated in larger firms. This can lead to profit-satisficing and the principal-agent problem.

Question 26

Minimum Efficient Scale

Answer 26

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

Question 27

Constant returns to scale

Answer 27

Range where the minimum efficient scale is constant.

Question 28

Total Revenue

Answer 28

The revenue received by a firm from its sales of a good or service.

Question 29

Average revenue

Answer 29

The average revenue received by a the firm per unit of output. Total revenue divided by quantity. It is also price without taxes.

Question 30

Marginal revenue

Answer 30

The additional revenue received by the firm if it sells an additional unit of output.

Question 31

Normal profit

Answer 31

the return needed for a firm to stay in the market in the long run. Includes opportunity cost.

Question 32

Supernormal profit

Answer 32

Profit above normal profits.

Question 33

Accounting profit

Answer 33

Profit made by a business based on explicit costs incurred but excluding opportunity cost.

Question 34

Shut down price

Answer 34

The price below which a firm will choose to exit the market because it is not able to pay for its variable costs.