Theme 3 econ definitions

Short run

when there is at least one fixed factor of production whose employment level cannot be changed 

Total costs

sum of fixed and variable costs of production (TC=FC+VC)

Fixed costs

costs that do not change as output changes (FC=TC-VC)

Variable costs

costs that change directly with output (VC= TC-FC)

Marginal cost

the change in total cost as output changes by one unit (MC=△TC/△Q)

Average fixed cost

variable cost per unit of output (AVC=VC/Q)

Average variable cost

Variable cost per unit of output (AVC=VC/Q)

Average total cost

 Total cost per unit of output (ATC=TC/Q)

The law of diminishing returns

Short run law that will cause output to rise at a slowing rate

Long run

 Where all factors of production can be varied and firms can change their scale

Economies of scale

benefits of long run expansion of output measured by falling unit costs

Diseconomies of scale

loss of efficiency caused by long run expansion of output

Constant returns to scale

when a firm doubles inputs and output exactly doubles, unit costs unchanged

Internal economies of scale

benefits of long run expansion felt only by the expanding firm 

External economies of scale

the benefits to all firms in an industry as the industry increase in size in the long run

Internal diseconomies of scale

the costs of having long run expansion felt by firm

External diseconomies of scale

the cost felt by all firms as industry increases in size

Minimum efficient scale

lowest level of output that a firm must produce where costs are minimised

Productive efficiency

where the firm has reached its optimal output and unit costs are minimised

Total revenue

 total income earned from sale (TR=P*Q)

Average revenue

average income earned from sale of one unit (AR =TR/Q)

Marginal revenue

change in firms revenue when sales changes by extra unit (MR=△TR/ △sales)

Profit maximising output rule

 firms should continue to produce and sell a good/service when mr = mc as extra revenue they gain is greater than or equal to the extra cost of making it