1.4.3 Diminishing returns and returns to scale updated

Economic methodology

The study of the methods, principles, and logic underlying economic theories and practices.

Price determination

The process by which the price of a good or service is established in a competitive market.

Perfect competition

A market structure where many firms offer identical products and no single firm can influence the market price.

Imperfectly competitive markets

Markets where individual firms have some influence over the price due to product differentiation.

Market failure

A situation where the allocation of goods and services is not efficient, often leading to a net social welfare loss.

Macroeconomics

The branch of economics that studies how the aggregate economy behaves.

Fiscal policy

Government policy regarding taxation and spending to influence the economy.

Monetary policy

The policy implemented by the central bank to control the money supply and interest rates.

The law of diminishing returns

A principle stating that if one factor of production is increased while others are held constant, the incremental output will eventually diminish.

Returns to scale

The change in output resulting from a proportional change in all inputs.

Normal profit

The minimum profit necessary for a firm to remain in business, often equated to total costs.

Shut down price

The price at which a firm will cease production because it cannot cover its average variable costs.

Marginal product

The additional output generated by adding one more unit of a variable factor of production.

Average product

The total output produced per unit of a variable input, calculated as total output divided by the quantity of the input.

Total product

The total output produced by all units of a variable input.

Economies of scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Diseconomies of scale

Increases in per unit costs as production increases, often due to managerial inefficiencies, communication problems, or overutilization of resources.

Long run

A period in which all factors of production can be varied, allowing firms to adjust their production processes completely.

Short run

A time frame in which at least one factor of production is fixed and cannot be changed.

Average variable cost (AVC)

The total variable costs divided by the number of units produced.

Marginal cost (MC)

The cost of producing one more unit of a good.

Price elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in price.

Market mechanism

The process by which market forces of supply and demand interact to determine prices and allocate resources.

Income distribution

The way in which a nation’s total economy is distributed among its population.

Wealth distribution

The distribution of assets among residents of an economy.

Circular flow of income

An economic model that depicts how money flows through the economy between households and firms.

Aggregate demand (AD)

The total demand for final goods and services in an economy at a given time and price level.

Aggregate supply (AS)

The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Fixed costs

Costs that do not change with the level of output; costs that must be paid regardless of production levels.

Variable costs

Costs that vary directly with the level of output.

Total costs

The total expense incurred in producing a certain level of output, comprising both fixed and variable costs.

Economies of scope

Cost advantages that result from a firm expanding its range of products or services.

Marginal return

The additional return gained from using an additional unit of factor input.

Output

The total amount of goods or services produced by a firm or economy.

Specialization

The process of focusing on a narrow range of activities or skills to increase efficiency.

Compulsory costs

Costs that a business must incur to operate within the market.

Competitive market

A market structure characterized by many buyers and sellers, where no single buyer or seller can influence the price.

Supply curve

A graphical representation of the relationship between the price of a good and the quantity supplied.

Demand curve

A graphical representation of the relationship between the price of a good and the quantity demanded.

Marginal revenue

The additional income from selling one more unit of a good; the change in total revenue from the sale of an additional unit.

Market research

The process of gathering, analyzing, and interpreting information about a market.

Consumer surplus

The difference between what consumers are willing to pay for a good or service and what they actually pay.