Microeconomics Booklet Four

Question 1

Abnormal/supernormal/economic profit

Answer 1

Profit over and above normal profit

Question 2

Average (or unit) cost

Answer 2

The average cost of producing one unit of output

Question 3

Average Return

Answer 3

The amount of output produced per unit of a variable factor of production

Question 4

Average Revenue

Answer 4

The average revenue a firm generates per unit sold

Question 5

Backward vertical merger

Answer 5

The acquisition of a business that is at an earlier stage of production ( i.e closer to the source of the raw material) in the same industry

Question 6

Barriers to entry

Answer 6

Facts that make it more difficult and/or expensive for new firms to enter a new market

Question 7

Barriers to exit

Answer 7

Factors that makes it more difficult and/or expensive for incumbent firms to leave a market

Question 8

Capitalism

Answer 8

An economic system where the means of production are controlled by the private sector and operated in the pursuit or profit

Question 9

Conglomerate merger

Answer 9

A merger between two firms with no common business interest

Question 10

Constant returns to scale

Answer 10

An increase in the quantity of all factors of production employed leads to a proportionate increase in output

Question 11

Contestable market

Answer 11

A market free from barriers to entry and exit

Question 12

Creative destruction

Answer 12

The process by barriers to entry are removed from markets (usually by technological advances), allowing new firms to replace older ones and creating new markets out of nothing

Question 13

Decreasing returns of scale

Answer 13

A situation where an increase in the quantity of all factors of production employed leads to a more than proportionate increase in output

Question 14

Diminishing marginal returns

Answer 14

A situation when an increase in the quantity of one variable input leads to a smaller increase in output than the addition of the previous unit

Question 15

Diseconomies of scale (internal)

Answer 15

An increase in long-run average costs arising from ah increase in a firm’s scale of operations

Question 16

Diseconomies of scale (external)

Answer 16

An increase in long-run average costs arising from an increase in the size of industry

Question 17

Divorce between ownership and control

Answer 17

A scenario where the people who own a firm are not the same people that run it, usually seen as the running of limited companies by managers rather than by shareholders

Question 18

Economics of scale (internal)

Answer 18

A reduction in long-run average costs arising from an increase in a firm’s scale of operations

Question 19

Economics of scale (external)

Answer 19

A reduction in long-run average costs arising from the growth of an industry as a whole

Question 20

External Growth

Answer 20

The growth of a firm through mergers and acquisitions

Question 21

Fixed cost

Answer 21

Costs that do not vary with output

Question 22

Forwarded vertical merger

Answer 22

The acquisition of a business that is at a later stage of production (i.e closer to the consumer) in the same industry

Question 23

Horizontal merger

Answer 23

A merger between two firms at the same stage of production in the same industry

Question 24

Increasing marginal returns

Answer 24

A situation when an increase in the quantity of one variable input leads to a larger increase in output than the addition of the previous unit

Question 25

Increasing returns to scale

Answer 25

An increase in the quantity of all factors of production employed leads to a more than proportionate increase in output

Question 26

(Product) Innovation

Answer 26

The exploitation of invention to create a product that can be marketed

Question 27

Internal (or organic) growth

Answer 27

The growth of a firm without mergers or takeovers

Question 28

Invention

Answer 28

The discovery of new technology through research and development

Question 29

Long run

Answer 29

The period of time in which all factors of production become variable in quantity

Question 30

Marginal cost

Answer 30

The change in total cost from the production of an additional unit of output

Question 31

Marginal return

Answer 31

The change in total output from an additional unit of a variable factor of production

Question 32

Marginal revenue

Answer 32

The change in total revenue from the sale of an additional unit of output

Question 33

Minimum efficient scale of production

Answer 33

The smallest scale of production at which average cost is minimised (the lowest point on the LRAC curve)

Question 34

Normal Profit

Answer 34

A level of profit which is just enough to cover the opportunity cost of the factors of production being used in the current employment

Question 35

Principal-agent problem

Answer 35

A scenario where the agents (e.g. managers) appointed by the principal (e.g. shareholders do not act as the principal would wish because they gave different incentives

Question 36

Process Innovation

Answer 36

The exploitation of invention to create new ways of producing goods or services

Question 37

Profit

Answer 37

An excess of revenue over costs

Question 38

Short run

Answer 38

The period of time in which at least one factor of production is fixed in quantity

Question 39

Total cost

Answer 39

The sum of total fixed costs and total variable costs

Question 40

Total revenue

Answer 40

Total output produced from a given quantity of a variable factor of production

Question 41

Variable cost

Answer 41

Costs that vary directly with output

Question 42

Zombie company/firm

Answer 42

A firm that is able to continue operating without becoming insolvent, but constrained by debts that it may only be able to pay the interest on