# Econ 3: Chapter:1 Definitions:

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Fixed Factor Inputs
Those factors inputs that DO NOT change as output is increased or decreased. E.G. Office and Capital equipment in Short Run
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Variable Factor Inputs
Those factor inputs that DO change with output. More of them are employed as production is increased and vice versa. E.G. Labour and Raw Materials
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Short-Run
Period of time in which AT LEAST ONE factor input is fixed. The firm can increase output by adding more variable factor inputs to the fixed factor inputs
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Long-Run
Period of time in which NO factor of production is fixed and can therefore can increase or decrease its scale of production by increasing or decreasing fixed factor inputs like Plants and Machines
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Total Product (TP)
The quantity of output,measured in physical units,produdeced by a given no of inputs over a period of time. It is a measure of PRODUCTION
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Average Product (AP)
The quantity of output per unit of variable inputs. It is the TP divided by the No of Units of the variable factors of production employed (E.G. Output per worker). It is a measure of PRODUCTIVITY
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Marginal Product (MP)
The change in TP when an additional unit of the variable factor of production is employed. For example marginal product of labour would measure the change in output that comes from increasing the employment of labour by one person. It is a measure of
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Law of Diminshing Returns
If increasing quantities of variable inputs are combined with a fixed input, eventually the MP and then the AP will decline. Diminishing returns exists when the MP decline occurs. This occurs because the advantages of specialisation begins to diminis
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Returns to Scale
Occurs in LONG-RUN and is the change in percentage of output resulting from a percentage changes in ALL THE FACTOR OF PRODUCTION
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Economies of Scale
The cost advantages exploited by expanding the scales of production in the long run. The effect is to reduce long run average costs over a larger range of output.
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Economic Costs
Sacrifices involved in performing one activity and includes the firm's EXPLICIT costs (explicit payment for factors of production) and a firms IMPLICIT Costs (Oppurtunity cost of employing resources in one activity rather than another. E.G. income fo
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Costs which DO NOT vary as the level of production increases or decreases. E.G. Rent and Machines in short run
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Variable Costs (Direct Costs)
Costs which vary directly in proportion to the level of output of the firm. E.G. labour and Raw Material.
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Semi-Variable Costs
Costs of which have BOTH a fixed and variable element. E.G. Electricity bills have a standard charge which is fixed and a variable cost of electricity used by machines in production
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Total Cost (TC)
Fixed Costs plus Variable Costs (FC=VC)
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Average Total Cost (ATC)
Total Cost divided by output comprising Average Fixed Cost (Fixed Costs divided by output) plus Average Variable Costs (Variable costs divided by output) TC/Q +ATC
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Marginal Costs (MC)
Costs for the extra unit of ouput found by dividing change in cost by change in output (∆Cost/∆Output)
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Productive Effieciency
When production takes place at the firm's minimum average total costs.
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Optimum Output
The output at which the firm has the ideal combination of fixed and variable factors to produce at the lowest average cost
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Mimimun Efficient Scale (MES)
This corresponding to the lowest point on the long run average total cost curve (LRATC) and the start of where the firm is at output of long-run productive efficiency.
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Total Revenue (TR)
Total revenue to a firm for sales of its products. It is price times quantity
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Average Revenue (AR)
Total revenue divided by the no of goods sold (TR/Q)
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Marginal Revenue (MR)
Addition to total revenue from producing one extra unit of output.
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Profit Maximisation
Where a firm chooses the level of output where MR=MC
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Normal Profit
Level of output where TR=TC and is the amount of profit required to keep the fators of production employed in present activity because costs equal opportunity costs
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Abnormal/Super-Normal Profit
A return above the normal profit where TR>TC
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Divorce Between Ownership and Control
Where the owners of the firms (shareholders) are not the ones in control of decisions made by the company (managers). Also known as the PRINCIPAL/AGENT PROBLEM
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Revenue Maximisation
Where a firm chooses the level of output where MR=0 thereby maximising TR
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Sales Maximisation
Where a firm chooses the level of output which sells as much as possible without making a loss. This is the point where ATC=AR at the most output level.
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Satisficing
When the firm is producing satisfactory but not maximun profit
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Cost-Plus Pricing
Where the firm sets its prices equal to the ATC at long-run levels of output plus a conventional mark-up
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Internal/Organic Growth
A firm will need to retain sufficient profits (Prough back profits) or use loans to finance expansion over a period of time by increasing the number of both fixed and variable factors within the firm
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External Growth
By integrating with other firms. Firms integrate through mergers, where there is a mutual agreement, or through acquisitions, where one firm purchases shares in another firm, with or without agreement
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Vertical intergration
Occurs when firms merge at different stages of production. There are 4 types BACKWARDS, FORWARDS, HORIZONTAL AND CONGLOMERATE OR DIVERSIFIED INTERGRATION
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Backwards Intergration
Occurs when a firm merges with another firm CLOSER TO THE SOURCE OF PRODUCT. E.G. Car producer buying a steel manufacturer.
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Forward Intergration
Occurs when a firms merges to MOVES CLOSER TO THE CONSUMER. E.G. Car producer buying a chain of car showrooms
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Horizontel Intergration
Occurs when firms merge at SAME STAGE OF PRODUCTION. E.G. Two car producer or two car showrooms
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Conglomerate or diversified intergration
Occurs when firms operating in completely different markets merge. E.G. Car producer merging with Travel Agent. In this case firms tend to retain their original name, and are owned as 'holding' company
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## Other cards in this set

### Card 2

#### Front

Those factor inputs that DO change with output. More of them are employed as production is increased and vice versa. E.G. Labour and Raw Materials

#### Back

Variable Factor Inputs

### Card 3

#### Front

Period of time in which AT LEAST ONE factor input is fixed. The firm can increase output by adding more variable factor inputs to the fixed factor inputs

### Card 4

#### Front

Period of time in which NO factor of production is fixed and can therefore can increase or decrease its scale of production by increasing or decreasing fixed factor inputs like Plants and Machines

### Card 5

#### Front

The quantity of output,measured in physical units,produdeced by a given no of inputs over a period of time. It is a measure of PRODUCTION