Theme 3 Textbook

Question 1

Define short-run

Answer 1

A period where a firm can only vary one factor of production

Question 2

Define long-run

Answer 2

A period where a firm can vary all its factors of production

Question 3

Define law of diminishing marginal productivity

Answer 3

If a firm increases one factor of production

It will eventually derive diminishing marginal productivity of the variable factor

Question 4

Define fixed costs

Answer 4

Costs that do not vary with level of output

Question 5

Define variable costs

Answer 5

Costs that vary with level of output

Question 6

Define average costs

Answer 6

Total cost / quantity produced

Question 7

Define marginal cost

Answer 7

The cost of producing an additional unit of output

Question 8

Define economies of scale

Answer 8

When an increase in a firms scale of production leads to production at lower long-run average cost

Question 9

Define management economies of scale

Answer 9

Economies of scale that arise when a larger firm is able to rationalise its management structure

Question 10

Define financial economies of scale

Answer 10

Economies of scale that arise when a larger firm is able to borrow at a lower interest rate

Because of its size

Question 11

Define purchasing economies of scale

Answer 11

Economies of scale that arise when a larger firm can obtain better terms from its suppliers

Question 12

Define technical economies of scale

Answer 12

Economies of scale that arise when increasing size allows improved technical efficiency

Question 13

Define productive efficiency

Answer 13

• When firms produce the maximum possible output from its factors of production
• MC=AC

Question 14

Define constant returns to scale

Answer 14

When long-run average costs remain constant with an increase in output

Question 15

Define diseconomies of scale

Answer 15

When an increase in the scale of production leads to higher long-run average costs

Question 16

Define minimum efficient scale

Answer 16

The level of output at which long-run average costs stop falling as output increases

Question 17

Formula for marginal cost

Answer 17

Change in cost / change in quantity

Question 18

Formula for total revenue

Answer 18

price x quantity sold

Question 19

Formula for average revenue

Answer 19

Total revenue / quantity sold

Question 20

Marginal revenue

Answer 20

Change in revenue / change in quantity sold

Question 21

Define normal profit

Answer 21

Profit that covers the opportunity cost of capital
Is just sufficient to keep firm in the market

Question 22

Define supernormal/abnormal proft

Answer 22

Profit that exceed normal profit

Question 23

Define marginal revenue

Answer 23

Additional value gained by a firm from selling an additional unit of output

Question 24

Define shut-down point

Answer 24

• The point at which a firm will cease production in the short run
• As it’s price does not cover variable costs

Question 25

At what point does profit maximising occur

Answer 25

MC=MR

Question 26

What could cause profit maximising to not occur

Answer 26

**Principal agent problem:** * Managers may prioritise gaining market share over profit maximising * Managers may divert profits into managerial perks

Question 27

At what point does revenue maximisation occur

Answer 27

MR=0

Question 28

At what point does sales maximisation occur

Answer 28

AC=AR

Question 29

At what point does normal profit occur

Answer 29

TR=TC

Question 30

At what point does abnormal profit occur

Answer 30

Profit is over and above normal profit

Question 31

Define satisficing

Answer 31

* The managers of a firm aim to produce satisfactory results for the firm * E.g. in terms of profits rather than trying to maximise them

Question 32

Define productive efficiency

Answer 32

The minimum average cost at which output can be produced

Question 33

Define static efficiency

Answer 33

Efficiency at a particular time

Question 34

Define X-inefficiency

Answer 34

When a firm is not operating at minimum cost

Question 35

Define allocative efficiency

Answer 35

AR=MC When society is producing appropriate goods and services relative to consumer preferences

Question 36

Define dynamic efficiency

Answer 36

The effect of innovation and technical advancements on productive efficiency in the long run

Question 37

Perfect competition

Answer 37

High number of firms No barriers to entry Homogenous nature of product Firms have no influence over price Perfect knowledge of market conditions

Question 38

Monopolistic competition

Answer 38

High number of firms No barriers to entry Differentiated nature of product Firms have some influence over price

Question 39

Oligopoly

Answer 39

Low number of firms Some barriers to entry Varied nature of product Some influence over price

Question 40

Monopoly

Answer 40

1 firm High barriers to entry No close substitutes Complete influence over price

Question 41

Define barriers to entry

Answer 41

A characteristic of a market that prevents new firms entering the market

Question 42

How do firms set prices in a perfectly competitive market

Answer 42

Firms are price takers Each firm must accept whatever price is set in the market Therefore demand is perfectly elastic