Microeconomics Booklet Four Flashcards
Abnormal/supernormal/economic profit
Profit over and above normal profit
Average (or unit) cost
The average cost of producing one unit of output
Average Return
The amount of output produced per unit of a variable factor of production
Average Revenue
The average revenue a firm generates per unit sold
Backward vertical merger
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
Barriers to entry
Facts that make it more difficult and/or expensive for new firms to enter a new market
Barriers to exit
Factors that makes it more difficult and/or expensive for incumbent firms to leave a market
Capitalism
An economic system where the means of production are controlled by the private sector and operated in the pursuit or profit
Conglomerate merger
A merger between two firms with no common business interest
Constant returns to scale
An increase in the quantity of all factors of production employed leads to a proportionate increase in output
Contestable market
A market free from barriers to entry and exit
Creative destruction
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
Decreasing returns of scale
A situation where an increase in the quantity of all factors of production employed leads to a more than proportionate increase in output
Diminishing marginal returns
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
Diseconomies of scale (internal)
An increase in long-run average costs arising from ah increase in a firm’s scale of operations
Diseconomies of scale (external)
An increase in long-run average costs arising from an increase in the size of industry
Divorce between ownership and control
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
Economics of scale (internal)
A reduction in long-run average costs arising from an increase in a firm’s scale of operations
Economics of scale (external)
A reduction in long-run average costs arising from the growth of an industry as a whole
External Growth
The growth of a firm through mergers and acquisitions
Fixed cost
Costs that do not vary with output
Forwarded vertical merger
The acquisition of a business that is at a later stage of production (i.e closer to the consumer) in the same industry
Horizontal merger
A merger between two firms at the same stage of production in the same industry
Increasing marginal returns
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
Increasing returns to scale
An increase in the quantity of all factors of production employed leads to a more than proportionate increase in output
(Product) Innovation
The exploitation of invention to create a product that can be marketed
Internal (or organic) growth
The growth of a firm without mergers or takeovers
Invention
The discovery of new technology through research and development
Long run
The period of time in which all factors of production become variable in quantity
Marginal cost
The change in total cost from the production of an additional unit of output
Marginal return
The change in total output from an additional unit of a variable factor of production
Marginal revenue
The change in total revenue from the sale of an additional unit of output
Minimum efficient scale of production
The smallest scale of production at which average cost is minimised (the lowest point on the LRAC curve)
Normal Profit
A level of profit which is just enough to cover the opportunity cost of the factors of production being used in the current employment
Principal-agent problem
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
Process Innovation
The exploitation of invention to create new ways of producing goods or services
Profit
An excess of revenue over costs
Short run
The period of time in which at least one factor of production is fixed in quantity
Total cost
The sum of total fixed costs and total variable costs
Total revenue
Total output produced from a given quantity of a variable factor of production
Variable cost
Costs that vary directly with output
Zombie company/firm
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
