2.5 Theory of the firm

Question 1

short run

Answer 1

The time period where there is at least one fixed factor of production that cannot be changed

Question 1

long run

Answer 1

The time period where all factors of production can be changed

Question 2

total product (TP)

Answer 2

The total quantity of output produced

Question 3

average product (AP)

Answer 3

Total product/labour; output per unit of variable factor (labour)used

Question 4

marginal product (MP)

Answer 4

ΔTotal Product/ΔLabour; extra output from one more unit of variable factor (labour) used

Question 5

explicit costs

Answer 5

Payment for the use of factors of production not owned by the firm

Question 6

implicit costs

Answer 6

The opportunity cost of using factors of production owned by the firm

Question 7

total costs (TC)

Answer 7

Fixed costs + variable costs = economic costs

Question 8

average costs

Answer 8

Total costs / total product; average cost of one unit of output produced

Question 9

marginal costs

Answer 9

ΔTotal Costs/ΔTotal Product; extra cost of producing one more unit of output

Question 10

total fixed costs (TFC)

Answer 10

Costs incurred from the utilisation of fixed factors of production

Question 11

total variable costs (TVC)

Answer 11

Costs incurred from the utilisation of variable factors of production

Question 12

constant returns to scale

Answer 12

Doubling all inputs exactly doubles output (LRAC is constant)

Question 13

increasing returns to scale

Answer 13

Doubling all inputs more than doubles output (LRAC falls)

Question 14

Decreasing returns to scale

Answer 14

Doubling all inputs less than doubles output (LRAC rises)

Question 15

long run average cost

Answer 15

The long run average cost represents the lowest possible average cost attainable at each output level when all factors of production are variable

Question 16

economies of scale (EOS)

Answer 16

Fall in average costs when a firm achieves a larger scale of production (increase all inputs)

Question 17

diseconomies of scale (DEOS)

Answer 17

rise in average costs when a firm achieves a larger scale of production (increase all inputs)

Question 18

total revenue

Answer 18

Total collections from the sale of output (price x quantity)

Question 19

average revenue

Answer 19

Total revenue/total output; average revenue earned from one unit of output sold

Question 20

marginal revenue

Answer 20

ΔTotal Revenue/ΔOutput; extra revenue from one more unit of output sold