Theory of the Firm - Vocabulary Flashcards
What is fixed cost?
costs of production that do not change with the level of output
What is variable cost?
costs of production that vary with level of output
What is total cost?
total costs of producing a certain level of output; fixed costs + variable costs
What is average cost?
average total cost of production per unit; total cost / quantity produced
What is marginal cost?
The additional cost of producing an additional unit of output
What is the short run?
period in time in which at least one factor of production is fixed
What is the law of diminishing marginal returns?
extra units of variable factor are applied to a fixed factor; output from each additional unit of the variable factor will eventually diminish
What is the long run?
the period of time in which all factors of production are variable
What are economies of scale?
any fall in long - run unit average costs that come about as a result of a firm increasing its scale of production; increasing efficiency
What are diseconomies of scale?
increases in long - run unit average costs that come about as a result of a firm increasing its scale of production
What is total revenue?
aggregate revenue gained by a firm from the sale of a particular quantity of output; price * quantity sold
What is average revenue?
total revenue / number of units sold
What is marginal revenue?
extra revenue gained from selling an additional unit of a good or service
What are normal profits?
the amount of revenue needed to cover the cost of factors of production, including the opportunity cost
What is super normal profit?
any level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service
What is the profit maximising level of output?
level of output where marginal revenue is equal to marginal cost
What is the short run shut down point?
price where average revenue is equal to average variable cost; below this price firms will shut down in the short run
What id the break - even price?
price where average revenue is equal to average total cost, below this price firms will shut down in the long - run
What is allocative efficiency?
level of output where marginal cost is equal to average revenue, or price, firms sell the last unit it produced at the amount it cost to make it
What is productive efficiency?
when production is achieved at the lowest level of cost per unit of output, where average cost is at its lowest value
What is perfect competition?
market structure with a very large number of small firms producing identical products; no firm can manipulate market supply and thus cannot control market price either; firms are price takers; there are no barriers to entry; consumers have perfect knowledge of the market
What is an oligopoly?
market structure where there is a small number of large firms which dominate the industry
What is a monopoly?
market form where there is only one firm in the industry
What are barriers to entry?
obstacles that may be in the way of potential newcomers from entering the market; such as economies of scale, product differentiation, and legal protection
