Definitions

Question 1

Fixed costs

Answer 1

Costs that do not vary with the output eg rent and advertising

Question 2

Variable costs

Answer 2

Costs that do vary with output eg wages and raw materials

Question 3

Semi variable costs

Answer 3

Costs that is fixed until a certain level of production is reached after which cost become variable

Question 4

Marginal cost

Answer 4

How much it costs firms to produce an additional unit of output

Question 5

Normal profit

Answer 5

A level of profit just enough to cover the opportunity cost of F.O.P being used in their current employment

Question 6

Economic profit / supernormal profit

Answer 6

Profit over and above normal profit

Question 7

Explicit costs

Answer 7

Fixed and variable costs actually paid such as rent and raw materials

Question 8

Production

Answer 8

Process of combining inputs into outputs

Question 9

Diminishing marginal returns

Answer 9

Adding an additional unit of input of One F.O.P that decreases output

Question 10

Total physical product

Answer 10

As the number of workers increases so does the output

Question 11

Marginal physical product

Answer 11

Increase in total physical product for each worker

Question 12

Marginal return

Answer 12

What is gained by adding an additional unit of one F.O.P

Question 13

Increasing returns to scale

Answer 13

Increase in quantity of all F.O.P employed leads to more than proportionate increase in output

Question 14

Constant returns to scale

Answer 14

Increase in quantity of all F.O.P employed leads to a proportionate increase in output

Question 15

Decreasing returns to scale

Answer 15

Increase in quantity of all F.O.P leads to less than proportionate increase in output

Question 16

Economies of scale internal and external

Answer 16

Reduction in a firms long - run averages costs due to an increase in the scale of firms operations (internal) or the growth of the industries (external )

Question 17

Diseconomies of scale internal

Answer 17

Increase in LRAC from an increase in a scales operations

Question 18

Diseconomies of scale external

Answer 18

Increase in LRAC from an increase in size of an industry

Question 19

Invention

Answer 19

Discovery of new ideas though R and d , new products

Question 20

Innovation

Answer 20

New ideas to bring a new product to the market , process of transforming inventions

Question 21

Process innovation

Answer 21

Finding new ways to produce a product

Question 22

Creative destruction

Answer 22

Barriers by entry are removed from markets , allowing new firms to replace older ones creating new markets out of nothing

Question 23

Capitalism

Answer 23

Means of production are controlled by the private sector

Question 24

Divorce between ownership and control

Answer 24

Firms that are ran by people who don’t own them

Question 25

Principle - Agent problem

Answer 25

Shareholders appoint an agent (manager) to run the firm but do not act as they wish because they have different incentives

Question 26

Profit satisficing

Answer 26

Firms aiming to achieve a certain level of profit and is less concerned with achieving any profit beyond this point

Question 27

Why would a business want to grow ?

Answer 27

To gain market power - may become price setters (monopoly) Improve brand recognition -demand for products may become price inelastic Achieve economies of scale Increase firms profit

Question 28

Internal / organic growth

Answer 28

Firm purchases new F.O.P

Question 29

External growth

Answer 29

Either merger or takeover of another business

Question 30

Takeover

Answer 30

One firm buys another

Question 31

Merger

Answer 31

Joining of two existing firms

Question 32

Horizontal

Answer 32

Two firms at same stage of production in the same industry join together e.g Disney and Pixar

Question 33

Forward vertical

Answer 33

Firm takes over another in the same industry but at later stage of production Eg dealership / show room to the company Ford

Question 34

Backward vertical

Answer 34

Firms take over another in the same industry but at an earlier stage of production Eg metal manufacturer to give to the company Ford

Question 35

Conglomerate

Answer 35

Two firms with no common Interest come together eg Ford and adidas

Question 36

Contestable markets

Answer 36

A market free from barriers to entry or exit

Question 37

Monopoly

Answer 37

Dominant firm at least 25% market share

Question 38

Barriers to entry

Answer 38

Factors that make it difficult / expensive for firms to enter a market

Question 39

Barriers to exit

Answer 39

Factors that make it difficult / expensive for firms to leave a market

Question 40

Costs

Answer 40

Amount of money spent

Question 41

Revenue

Answer 41

Money gained

Question 42

Revenue

Answer 42

Money gained

Question 43

Return

Answer 43

Output produced

Question 44

Return

Answer 44

Output produced

Question 45

Accounting profit

Answer 45

Amount of profit which only considers explicit costs (TF and TV costs ) and not opportunity cost (implicit)

Question 46

Average costs

Answer 46

How much is cost firms to produce one unit of output