Rational Producer Behaviour

Question 1

Explicit costs

Answer 1

Actual expenses a firm incurs

Question 2

Implicit costs

Answer 2

Potential income given up in order to operate a firm

Question 3

Revenue

Answer 3

Income earnt by the firm from its business activities

Question 4

Profit

Answer 4

Profit occurs when total revenue is greater than total costs.

Question 5

Short run

Answer 5

When a factor of production is fixed and others are variable

Question 6

Long run

Answer 6

All factors of production are variable

Question 7

When does the law of diminishing return apply?

Answer 7

In the short run

Question 8

Accounting profit

Answer 8

Total revenue - explicit costs

Question 9

Economic profit

Answer 9

Accounting profit - implicit costs

Question 10

Diminishing returns

Answer 10

Production is increasing but at a diminishing rate

Question 11

Increasing return

Answer 11

When total product is increasing at an increasing rate and marginal product is increasing

Question 12

Negative return

Answer 12

Total product decreases, marginal product is negative

Question 13

When MP>AP

Answer 13

AP increases

Question 14

When MP<AP

Answer 14

AP decreases

Question 15

When will MP intersect AP

Answer 15

AP’s maximum point

Question 16

Costs of production

Answer 16

Any inputs into the production of goods and services is considered costs

Question 17

Fixed cost

Answer 17

Costs that stays the same regardless on how much is produced (rent, interest on loan)

Question 18

Variable cost

Answer 18

Costs which will change as production levels change. (materials, wages, electricity)

Question 19

When will a firm supply goods?

Answer 19

When price equals AVC

Question 20

Economies of scale

Answer 20

The decrease in average costs of production due to the increase in production due to gains in efficiency

Question 21

Economies of scale occurs due to

Answer 21

• Worker specialisation
• Bulk buying
• Financial economies
• Transport economies

Question 22

Worker specialisation

Answer 22

Jobs are divided up eg division of labour

Question 23

Bulk buying

Answer 23

Paying less per unit of raw materials

Question 24

Financial economies

Answer 24

Cost of borrowing interest for a larger firm is less than a smaller firm

Question 25

Transport economies

Answer 25

Larger firms have lower costs as they have their own delivery fleet

Question 26

Diseconomies of scale occur due to…

Answer 26

Firm becoming too large for the market leading to wastage, decreased worker efficiency

Question 27

Revenue is dependent on

Answer 27

Quantity of goods/services and price of goods and services

Question 28

Profit maximisation

Answer 28

Firms will always try to maximise the amount of profit they can make

Question 29

Max profit in TR/TC curves

Answer 29

Point where the distance between TR and TC is at the greatest point

Question 30

Max profit in MR/MC curves

Answer 30

Where MR=MC

Question 31

Abnormal profit

Answer 31

Firm is making a profit more than sufficient to keep the business owner in the activity (AR>AC)

Question 32

Normal profit

Answer 32

Profit is just enough to keep business in that activity (AR=AC)

Question 33

Economic loss

Answer 33

When a firm is making profits less than is expected for that type of industry (AR<AC)

Question 34

Objective of firms other than maximising profit (4)

Answer 34

Corporate social responsibility, satisficing, growth maximisation, revenue maximisation

Question 35

Corporate social responsibility

Answer 35

When a businesses includes the public interest in its decision making ie fairtrade

Question 36

Satisficing

Answer 36

When a firm aims to perform satisfactory rather than at a profit maximising level (want work/life balance, don’t want to push themselves)

Question 37

Growth maximisation

Answer 37

Aim to grow their share of the market as a priority in the short run ie low price for short time to gain customer base

Question 38

Revenue maximisation

Answer 38

Firm measures success by the amount of revenue earned