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18 Cards in this Set

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Fixed cost
A cost which does not vary with output in the short-run (e.g. rent, insurance, etc).
Variable cost
A cost which varies with output in both the short and long-run (e.g. raw materials, direct labour, etc).
Sunk cost
A cost which is irrecoverable upon exiting the industry (e.g. advertising, R&D, etc).
Total cost
TC = TFC + TVC
Average cost
Cost per unit of output.
TC/Q
Marginal cost
The addition to TC from producing one more unit of output.
change in TC/change in Q
Total Revenue
The total income gained from selling the firm’s output.
TR = P-Q
Average revenue
Revenue per unit of output.
TR/Q
Marginal revenue
The addition to TR from selling one more unit of output.
change in TR/change in Q
Internal Economies of Scale
Internal economies of scale can be defined as a fall in long-run average cost associated with an increase in output for an individual firm.
External Economies of Scale
Internal economies of scale occur when an individual firm expands, whereas external economies of scale have an impact on the entire industry and therefore lower the long-run average cost curve at each output level.
Diseconomies of scale
A rise in long-run average costs as output increases.
Allocative efficiency
Where society gets the optimum mix of goods and services in the highest possible quantities, at which point P = MC.
Productive efficiency
Any level of output at which LRAC is minimised; occurs where LRAC = LRMC.
Dynamic efficiency
Reinvestment of profits into R&D to promote faster rate of technological development that will reduce costs and produce better quality products for consumers. Often finance with supernormal profits (hence feasible when AR>AC)
Minimum efficient scale
The level of output at which LRAC stops falling (i.e. the smallest level of output at which the firm is productively efficient).
Normal profit
The minimum (accounting) profit which the entrepreneur needs to remain in long-term production (i.e. the opportunity cost of capital and enterprise). Occurs at the level of output where AR = AC.
Supernormal profit
Any profits in excess of normal profits. Occurs at any level of output where AR > AC