Unit 3: Firms' production and objectives KEY WORDS

Chapter 1: The theory of Production

Chapter 2: The objective of Firms

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Total Costs
Fixed costs + variable costs
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Fixed Costs
Costs of production that do not vary as output changes
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Variable Costs
Costs of production that vary with output
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Long run
Period of time during which all factors of production become variable and the scale of output can change
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Short Run
Period of time during which fixed costs and the scale of production remain fixed
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Marginal Product
The output added by the extra worker or unit of a factor
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Increasing Marginal Product
Where the addition of an extra variable factor adds more output that the previous variable factor
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Average Product
The total product divided by the number of workers
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Law of Diminishing Returns
Where increasing amounts of a variable 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 cost
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Productive Efficiency
When a firm operates at minimum average total cost, producing the maximum possible output from inputs into the production process
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Depreciation
In relation to fixed assets, a fall in the value of an asset during its working life
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Semi-variable Costs
Costs which have both a fixed and variable element, e.g. landline telephone usage
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Average Fixed Cost
Total fixed costs divided by the number produced
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Average Variable Cost
Total variable costs divided by the number produced
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Average Total Cost
Total cost divided by the number produced
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Marginal Cost
The cost of the extra unit of output
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Increasing Returns to Scale
Where an increase in factor inputs leads to a more than proportionate increase in outputs
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Decreasing Returns to Scale
Where an increase in factor inputs leads to a less than proportionate increase in factor outputs
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Constant Returns to Scale
Where an increase in factor inputs leads to a proportional increase in factor outputs
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Minimum Efficient Scale
This corresponds to the lowest point on the long-run average total cost curve and is also known as the output of long-run productive efficiency
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Profits
When total income or revenue for a firm is greater than total costs
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Total revenue
What the firm receives for the sale of its product
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Average revenue
Total revenue divided by the number sold
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Marginal Revenue
The addition to total revenue from the production of one extra unit
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Total Profit
Total revenue minus total cost
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Normal Profit
The amount required to keep a factor employed in its present activity in the long run
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Profit Maximisation
Where a firm chooses a level of output where marginal revenue equals marginal costs
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Supernormal Profit
A return above normal profit - a surplus payment
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Sub-normal Profit
Profit below normal which should lead to the firms leaving the industry
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Entrepreneur
Individual who organises the factors of production in order to make a profit
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Horizontal Integration
Where two firms at the same stage of production combine
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Vertical Integration
Where firms at different stages of production combine
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Conglomerate Integration
Where two firms with no obvious connection combine
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Lateral Merger
A type of horizontal merger by which there are some similarities between the firms e.g. a brewery and a restaurant
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Capital Market Discipline
Where a firm may be taken over by other firms if they appear to be making lower profits than their assets would suggest
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Delisting
Refers to the practice of removing the stock of a company from a stock exchange so that investors can no longer trade shares of the stock on that exchange
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Innovation
Turning invention into commercial use; introducing a new product or process
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Stakeholders
Firms, organisations or individuals with an interest in the firm
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Carbon Footprint
The amount of greenhouse gases produced measured in terms of carbon dioxide
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Corporate Citizenship
Indicates that the organisations embrace sustainable development
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Market Share
Percentage of the total market held by the firm
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Market Power
When a firm has the ability to exert significant influence over the quantity of goods traded or at the price at which they are sold
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Rational Choice Theory
Where all the costs and benefits are considered before a decision is taken
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Satificing
The firm is producing satisfactory but not maximum profit
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Hostile Bid
A bid to buy shares in an attempt to gain control of the firm which is opposed to by the firm's directors who fear job losses
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Activist Shareholders
Shareholders that will clamour for greater dividends and may mobilise other shareholders to opposed management
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Annual General Meeting
Annual meeting where shareholders can disuss the accounts and elect directors
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Share Options
The right to buy or sell stock at an agreed price
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Divedends
Financial returns from the ownership of shares in a firm
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Perks
Non-monetary benefits like an expensive car provided by the firm
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Director
An individual elected by a company's shareholders to set corporate policies
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Corportation
A private enterprise firm incorporated with The Registrar of Companies
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Public Limited Company
A firm owned by a group of shareholders whose shares can be traded on the London Stock Exchange
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Other cards in this set

Card 2

Front

Costs of production that do not vary as output changes

Fixed Costs

Card 3

Front

Costs of production that vary with output

Card 4

Front

Period of time during which all factors of production become variable and the scale of output can change

Card 5

Front

Period of time during which fixed costs and the scale of production remain fixed