Theory of Firms (Costs Theory)

Question 1

Law of diminishing returns

Answer 1

if some inputs are increased whilst at least one other is fixed, whilst the extra output produced may at first increase but it will reach a point where after it will diminish

Question 2

Short run

Answer 2

period of time in which at least one factor of production is fixed. All production takes place in the short run

Question 3

Long run

Answer 3

period of time in which all factors of production are variable, but the state of technology is fixed. The firm can change its size or its scale of production. All planning takes place in the long run

Question 4

A firm

Answer 4

organisation that brings together different factors of production (land, labor, capital, enterprise) to produce goods and services which is then hoped can be sold for a profit

Question 5

Profit

Answer 5

The difference between TOTAL REVENUE (TR) and TOTAL COSTS (TC) so that the firm will want to produce that level of output where revenue exceeds costs by the greatest amount

Question 6

Economies of scale

Answer 6

decreasing costs per unit

Question 7

Diseconomies of Scale

Answer 7

increasing costs per unit

Question 8

Fixed costs (TC)

Answer 8

Cost that arise even when output is 0

Question 9

Variable costs (VC)

Answer 9

Cost that vary with level of output

Question 10

Total costs (TC)

Answer 10

FC + VC

Question 11

Average costs

Answer 11

the cost per unit of production/output (Can also look at AFC, AVC, and ATC)

Question 12

Marginal cost

Answer 12

the addition to cost from producing an additional unit of output

Question 13

Marginal cost (MC) formula

Answer 13

ᐃTC/ᐃq

Question 14

Break even point

Answer 14

TR = TC. At this level of output, firms earn just enough to keep them in the market

Question 15

Shut down point

Answer 15

The price at which a firm is able to cover its variable costs in the short run so P = AVC, so it is only losing its fixed costs. Anything below and the firm will shut down in the short run

Question 16

Normal Profit, Economic (Abnormal) profit, Loss

Answer 16

Normal Profit = TR = TC
Abnormal Profit = TR > TC
Loss = TR < TC

Question 17

Total revenue

Answer 17

total amount of money that a firm receives from selling a certain amount of a good or service in a given time period

Question 18

Marginal revenue

Answer 18

the addition to revenue from selling an additional unit in a given time period

Question 19

Profit maximization

Answer 19

MR = MC
greatest positive difference between total revenue and total costs. It is achieved by increasing total revenue or minimizing costs of production

Question 20

Revenue maximization

Answer 20

It is greater than the profit maximising level of Q
where MR = 0

Question 21

Market Share

Answer 21

a firm’s portion of total value of sales in a particular industry

Question 22

Satisficing

Answer 22

A firm makes enough profit to satisfy different stakeholders OR pursue other objectives OR because decision makers don’t have the necessary info in order to maximise profits

Question 23

CSR

Answer 23

Corporate Social Responsibility - public interest decision making where firms employ an ethical code, focus on their impact on the workforce, consumers, local community, environment, etc. (e.g. fair trade)

Question 24

Total Cost, Total Revenue, Total Fixed Cost Diagram

Question 25

Diagrm of Short Run AVC, AFC, MC

Question 26

Economies of Scale Diagram

Question 27

LRAC and SRAC curve

Question 28

Average Revenue

Answer 28

Revenue earned per unit of sales
AR = TR/q

Question 29

Revenue when price doesn’t change with output (PED = ∞)

Answer 29

D = AR = MR

Question 30

Revenue when price doesn’t change with output (PED = ∞) + Marginal Cost

Question 31

Revenue when price falls as output increases (downward sloping, PED falls as Q rises) + Explanation

Question 32

Revenue Theory

Answer 32

• Total Revenue (TR)
• Average Revenue (AR)
• Marginal Revenue (MR)
• Profit (or loss) = TR - TC

Question 33

Cost Theory

Answer 33

• Fixed Costs (TFC or FC)
• Variable Costs (TVC or VC)
• Total Cost (TC) = FC + VC
• Average Cost (AC)
• Marginal Cost (MC)

Question 34

Profit Theory

Answer 34

Accountant:
Profit = TR - TC

Economist:
Profit = TR - economic cost (explicit and implicit)

Question 35

Explicit Costs

Answer 35

any costs to a firm that invovle the direct payment of money

Question 36

Implicit Costs

Answer 36

the earnings of a irm could have had if it had employed its factors in another use or if it had hired out or sold them to another firm
e.g. opportunity costs, or factors taht are already owned by the firm

Question 37

Shut down and Break even price in diagrma

Question 38

Using diagram to show different profit and loss situation