Economic definitions Unit 3, Chapter 1

defintions of fisrt chapter of all the costs

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Total Costs

 

All the costs faced by a business. TC= FC+VC

 

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Fixed Costs

Costs of production that do not change as output changes e.g. rent, interest on loans.

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Variable Costs

Costs of production that change as output changes e.g raw materials.

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Short Run

Period during which fixed costs and the scale of production cannot be changed. At least 1 variable is fixed.

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Marginal product of labour

Addition to total output as a result of employing one extra worker.

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Increasing marginal returns

Where the addition of an extra unit of a varibale factor adds more output than the previous unit of the same variable factor.

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Average product

The total product divided by the number of units of a factor used- often labour.

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Law of diminishing marginal returns

Where increasing amounts of a variable factor are added to a fixed factor and the amount added to total product by each additional unit of the variable factor eventually decreases.

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Optimal output

The ideal combination of fixed and variable factors to produce the lowest average total costs.

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Productive efficiency

When a firm operates at minimum average total cost, producing the maximum possible outputs from inputs into the production process.

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Depreciation

In relation to fixed asests, a fall in the value of an assest during its working life.

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Semi-variable costs

Costs which have both fixed and variable elements e.g landline telephone usage.

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Average fixed costs

Total fixed costs divided by output. FC/Q

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Average variable costs

Total variable cost divided by output. VC/Q.

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Average total cost

Total cost divded by output. TC/Q. or  ATC= AFC+AVC

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Marginal cost

The addition to total costs as a result of making one extra unit of output. MC= change in TC/ change in output.

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Increasing returns to scale

Where an increase in variable factor inputs leads to a more than proportionate increase in output.

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Decreasing returns of scale

Where an increase in variable factor inputs leads to a less than proportionate increase in outputs.

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Constant returns of scale

Where an increase in variable factor inputs leads to a proportional increase in outputs. 

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Minimum efficient scale

This corresponds to the lowest point on the long-run average total cost curve. Also known as the output of long-run productive efficiency.

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Normal Profit

The level of profit that is enough to keep a firm in an industry or to keep an entrepreneur in their business activity. Normal profit is included in costs.

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Supernormal Profit

Any level of profit in excess of normal profit. 

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Supernormal Profit

Any level of profit in excess of normal profit. 

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