Production, Costs And Revenue

Front 1

Firm

Back 1

A productive organisation that produces a good or service commercially.

Front 2

Law of Diminishing returns

Back 2

A short-term law which states that as a variable factor of production is added to a fixed factor of production, eventually both the marginal and average returns to the variable factor will begin to fall.

Front 3

Average returns of labour

Back 3

Total output divided by number of workers employed.

Front 4

Total returns of labour

Back 4

Total output of all workers at the firm.

Front 5

Short run

Back 5

At least on of the factors of production is fixed, operating inside or on the firms PPF.

Front 6

Long run

Back 6

No factors of production are fixed, able to shift the firms PPF outwards.

Front 7

Productivity

Back 7

Output per unit of input

Front 8

Returns to scale

Back 8

The rate by which the output changes if the scale of all the factors of production is changed. (long run). Comes in increasing, constant and decreasing forms.

Front 9

Economy of scale

Back 9

As output increases, long-run average cost decreases.

Front 10

Diseconomy of scale

Back 10

As output increases, long-run average costs increase.

Front 11

Long-run average cost

Back 11

Cost per unit of output incurred when all factors of production or inputs can be varied.

Front 12

Minimum efficient scale

Back 12

The lowest output at which the firm is able to produce at the minimum acheivable LRAC.

Means that firm has benifitted to the full from economies of scale

Hint 12

Front 13

Optimum firm size

Back 13

The size the firm is capable of producing at the lowest average cost and thus being productively efficient.

Front 14

External economy of scale

Back 14

A fall in LRAC resulting from the growth of the market of the industry of which the firm is a part.

Front 15

External diseconomy of scale

Back 15

An increase in LRAC resulting from the growth of the market of the industry of which the firm is a part.

Front 16

Marginal cost

Back 16

Cost of producing one more unit of output

Hint 16

Front 17

Average fixed cost

Back 17

TFC/Q=AFC, the total cost of employing fixed factors of production to produce at a particular level of output, divided by the size of the output.

Hint 17

Front 18

Average variable cost

Back 18

AVC=TVC/Q

Hint 18

Front 19

Average total costs

Back 19

ATC=AFC+AVC, often called average cost.

Hint 19

Front 20

All costs/revenue combined

Back 20

Front 21

Average revenue

Back 21

AR=TR/Q=PxQ/Q=P

AR is the cost of the good, therefore it is the same as the demand curve

Front 22

Marginal revenue

Back 22

Addition to total revenue from selling one more unit of the product, slopes at twice the rate of AR.

Front 23

Conditions of perfect competition.

Back 23

-Large number of buyers and sellers

-perfect information

-consumers can buy as much as they want and sellers can sell as much as they want at market ruling price

-individual consumers or suppliers cannot change market ruling price (price takers)

-Homogeneous goods

-no barriers to enter or exit in the long run

Front 24

AR/MR in perfect competition

Back 24

Front 25

Quantity setter

Back 25

When a firm faces a downwards facing demand curve for its product it possesses the market power to set the quantity of the good it wishes to sell

Hint 25

e.g. monopolies

Front 26

Price maker

Back 26

When a firm faces a downwards facing demand curve for its product it possesses the market power to set the price of the good it wishes to sell

Front 27

AR/MR in monopoly

Back 27

Hint 27

MR and AR are relatively steeper than other competitive markets

Front 28

Profit

Back 28

The difference between total sales revenue and total costs of production

Front 29

Normal Profit

Back 29

The minimum profit a firm must make to stay in business, which is not enough to attract new firms into the market

Front 30

Abnormal profit

Back 30

Profit over and above normal profit.

Hint 30

Also known as:

-Super normal profit

-Economic profit

-Above normal profit

Front 31

Profit maximisation

Back 31

Occurs at level of output at which total profit is maximized.

Hint 31

when MR=MC

Front 32

The role of profit in a market economy

Back 32

-Creation of business incentives, attracts new firms to the market.

-Worker incentives, use of profit related pay.

-Shareholder incentives, higher profits lead to higher dividends, share price rises so easier to raise finance.

-Economic efficiency, high profits mean efficient production.

-Reward for risk, profit is the reward for innovation.

-Business finance, funds organic growth.

-Signals economy's health, shows improvements in supply side policy

Front 33

Invention

Back 33

Creating something entirely new; something that did not exist before

Front 34

Innovation

Back 34

Improving on a previous invention, thereby turning the results of invention into a product

Front 35

Mechanisation

Back 35

The process of moving from labour intensive to a more capital intensive method of production.

The use of machinery instead of workers

Front 36

Automation

Back 36

Automatic control where machines control other machines

Front 37

Productive efficiency

Back 37

The level of output where average costs of production are minimised

Front 38

Dynamic efficiency

Back 38

Occurs in the long run, leading to the development of new products and more efficient processes that improve productive efficiency

Hint 38

E.g. ford cars, the production in the 1950s was productive at the time, but would not be today due to new production methods

Front 39

Creative destruction

Back 39

Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies.

Front 40

Monopolistic Competition

Back 40

A market structure in which firms have many competitors nut each sell a slightly different product.

Front 41

Duopoly

Back 41

Two firms only in a market

Hint 41

E.g. Pepsi co and coca cola