Micro Book 4

Question 1

marginal cost

Answer 1

how much it costs a firm to produce one additional unit of output

Question 2

marginal revenue

Answer 2

the net reciepts from selling an additional unit of output

Question 3

normal profit

Answer 3

the amount of profit that just covers the opportunity cost of the factors of production being used in this way

Question 4

economic profit

Answer 4

anything above normal profit

Question 5

production

Answer 5

taking the factor inputs and combining them into an output

Question 6

the short run

Answer 6

the time period when at least one factor of production is fixed in quantity

Question 7

the long run

Answer 7

the time period when all factors of production become variable in quantity

Question 8

marginal return

Answer 8

what’s gained by adding one additional unit of one factor of production

Question 9

total physical product

Answer 9

the total amount of output

Question 10

marginal physical product

Answer 10

the increase in total physical product for each additional worker

Question 11

increasing returns to scale

Answer 11

when an increase in the scale of operations leads to a more than proportionate increase in total output

Question 12

constant returns to scale

Answer 12

if the percentage change in inputs to production is equal to the percentage change of output

Question 13

decreasing returns to scale

Answer 13

if the increase in output is less that proportionate to the increase in factor inputs

Question 14

internal economies of scale

Answer 14

reductions in a firm’s long run average costs due to an increase in the scale of the firm’s operations

Question 15

external economies of scale

Answer 15

reductions in a firm’s long run average costs due to the growth of the industry

Question 16

5 internal E.O.S

Answer 16

• technical (better machinery)
• financial (lower interest rates due to more assets)
• managerial (specialist managers increase productivity)
• commercial/purchasing/marketing
• risk-bearing (operating in multiple markets)

Question 17

2 external E.O.S

Answer 17

• geographical (area known for a product builds a reputation therefore lower marketing costs, local college training and suppliers move closer)
• information (industry conducts more R+D)

Question 18

minimum efficient scale of production

Answer 18

lowest point on an LRAC curve so is minimum scale of production where the firm is productively efficient

Question 19

creative destruction

Answer 19

technological advances removing barriers to entry from markets allowing new firms to replace older ones and create new markets out of nothing

Question 20

objectives of firms (7)

Answer 20

• profit maximisastion
• survival/break-even
• increased market share
• business growth
• social objectives (e.g. not for profits)
• revenue maximisation

Question 21

divorce between ownership and control

Answer 21

when objectives of those running a firm differ from those of people who own the firm

Question 22

reasons businesses want to grow (4)

Answer 22

• gain market power
• achieve E.O.S
• improve brand recognition
• increase profits

Question 23

possible barriers to entry (6)

Answer 23

• large set up costs
• sunk costs
• economies of scale
• natural cost advantages
• legal barriers
• marketing barriers and branding