Theory of the Firm - Vocabulary

Question 1

What is fixed cost?

Answer 1

costs of production that do not change with the level of output

Question 2

What is variable cost?

Answer 2

costs of production that vary with level of output

Question 3

What is total cost?

Answer 3

total costs of producing a certain level of output; fixed costs + variable costs

Question 4

What is average cost?

Answer 4

average total cost of production per unit; total cost / quantity produced

Question 5

What is marginal cost?

Answer 5

The additional cost of producing an additional unit of output

Question 6

What is the short run?

Answer 6

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

Question 7

What is the law of diminishing marginal returns?

Answer 7

extra units of variable factor are applied to a fixed factor; output from each additional unit of the variable factor will eventually diminish

Question 8

What is the long run?

Answer 8

the period of time in which all factors of production are variable

Question 9

What are economies of scale?

Answer 9

any fall in long - run unit average costs that come about as a result of a firm increasing its scale of production; increasing efficiency

Question 10

What are diseconomies of scale?

Answer 10

increases in long - run unit average costs that come about as a result of a firm increasing its scale of production

Question 11

What is total revenue?

Answer 11

aggregate revenue gained by a firm from the sale of a particular quantity of output; price * quantity sold

Question 12

What is average revenue?

Answer 12

total revenue / number of units sold

Question 13

What is marginal revenue?

Answer 13

extra revenue gained from selling an additional unit of a good or service

Question 14

What are normal profits?

Answer 14

the amount of revenue needed to cover the cost of factors of production, including the opportunity cost

Question 15

What is super normal profit?

Answer 15

any level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service

Question 16

What is the profit maximising level of output?

Answer 16

level of output where marginal revenue is equal to marginal cost

Question 17

What is the short run shut down point?

Answer 17

price where average revenue is equal to average variable cost; below this price firms will shut down in the short run

Question 18

What id the break - even price?

Answer 18

price where average revenue is equal to average total cost, below this price firms will shut down in the long - run

Question 19

What is allocative efficiency?

Answer 19

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

Question 20

What is productive efficiency?

Answer 20

when production is achieved at the lowest level of cost per unit of output, where average cost is at its lowest value

Question 21

What is perfect competition?

Answer 21

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

Question 22

What is an oligopoly?

Answer 22

market structure where there is a small number of large firms which dominate the industry

Question 23

What is a monopoly?

Answer 23

market form where there is only one firm in the industry

Question 24

What are barriers to entry?

Answer 24

obstacles that may be in the way of potential newcomers from entering the market; such as economies of scale, product differentiation, and legal protection