Markets, Firms & Decisions – Cost and Revenue Vocabulary

Vocabulary flashcards covering key cost, revenue, scale, and market-structure terms from Unit 4A lecture notes.

Plant

A physical site, such as a factory or warehouse, where production or distribution occurs.

Firm

A decision-making unit that hires factors of production, combines them to create output and sells the resulting goods or services; may operate multiple plants.

Industry

All the firms that produce similar goods or services, e.g., the beverage industry.

Fixed Factor

An input whose quantity cannot be changed within a given time period (e.g., land, heavy machinery).

Variable Factor

An input whose quantity can be adjusted in the given time period (e.g., labour, raw materials).

Short Run (production)

A period in which at least one factor of production is fixed; output can only rise by using more variable inputs.

Long Run (production)

A time period long enough for all factors of production to be varied; no inputs are fixed except technology.

Explicit Cost

Opportunity cost involving actual monetary payment for resources not owned by the firm (e.g., wages, rent).

Implicit Cost

Opportunity cost of using resources the firm already owns, including the owner’s forgone earnings and returns.

Total Fixed Cost (TFC)

The sum of costs of all fixed inputs; constant regardless of output level.

Total Variable Cost (TVC)

The sum of costs of variable inputs; rises as output increases and is zero when output is zero.

Total Cost (TC)

In the short run, the sum of total fixed cost and total variable cost (TC = TFC + TVC).

Average Cost (AC)

Cost per unit of output (AC = TC ⁄ Q); equals AFC + AVC.

Average Fixed Cost (AFC)

Fixed cost per unit of output (TFC ⁄ Q); falls continuously as output rises.

Average Variable Cost (AVC)

Variable cost per unit of output (TVC ⁄ Q); typically U-shaped.

Marginal Cost (MC)

The change in total cost resulting from producing one more unit of output (ΔTC ⁄ ΔQ).

Law of Diminishing Marginal Returns

As additional units of a variable input are added to fixed inputs, beyond some point the marginal product of the variable input falls.

Long-Run Average Cost (LRAC)

The lowest attainable average cost for each output level when all inputs are variable.

Internal Economies of Scale

Cost advantages arising within a firm when average cost falls as the firm’s scale of production increases.

External Economies of Scale

Cost advantages that accrue to all firms in an industry when the industry as a whole expands, shifting each firm’s LRAC downward.

Internal Diseconomies of Scale

Cost disadvantages within a firm that cause average cost to rise when the firm grows too large.

External Diseconomies of Scale

Cost increases for all firms that occur when industry expansion raises average cost, shifting LRAC upward.

Technical Economies of Scale

Cost savings from using more efficient, often indivisible, capital equipment as scale expands.

Managerial Economies of Scale

Cost savings from greater labour specialisation and employment of professional managers in larger firms.

Marketing Economies of Scale

Lower average marketing or purchasing costs achieved through bulk buying or spreading advertising over more units.

Financial Economies of Scale

Ability of large firms to obtain funds at lower interest rates or raise capital by issuing shares, reducing average financing cost.

Network Economies of Scale

Situation where the value of a product or service increases as more users join the network, while marginal cost of adding users is near zero.

Minimum Efficient Scale (MES)

The smallest output level at which LRAC reaches its minimum and stops falling.

Optimum Output Level

The level of output corresponding to the minimum point on the LRAC curve, where the firm operates at lowest average cost.

Natural Monopoly

A market where extensive internal economies of scale mean one firm can supply the entire market at lower cost than multiple firms.

Market Power

A firm’s ability to influence the market price of its product without losing all sales.

Barrier to Entry

Any factor that prevents or deters new firms from entering an industry and competing with incumbents.

Natural Barriers to Entry

Entry obstacles arising from factors like economies of scale, ownership of essential resources, or high capital requirements.

State-created Barriers to Entry

Legal restrictions such as licences, patents, copyrights or trademarks that limit market entry.

Firm-created Barriers to Entry

Strategic actions by incumbents (e.g., heavy advertising, product proliferation, predatory pricing) that deter potential entrants.

Concentration Ratio

The percentage of total industry output accounted for by the largest specified number of firms; measures market power.

Total Revenue (TR)

Total money received from selling a given quantity of output (TR = P × Q).

Average Revenue (AR)

Revenue per unit of output (AR = TR ⁄ Q); equals price for each unit sold.

Marginal Revenue (MR)

The change in total revenue when one additional unit of output is sold (ΔTR ⁄ ΔQ).

Perfect Competition

A market structure with many small firms producing a homogeneous product and no barriers to entry; firms are price takers.

Price Taker

A firm that must accept the market price for its product because it cannot influence that price by altering its output.

Imperfect Competition

Market situations where firms have some power to influence price; includes monopolistic competition, oligopoly and monopoly.

Monopolistic Competition

A market with many firms selling slightly differentiated products and weak barriers to entry.

Oligopoly

A market dominated by a few large firms whose decisions are mutually interdependent; barriers to entry are high.

Monopoly

A market with a single seller of a product that has no close substitutes and faces very high barriers to entry.

Price Setter

A firm with sufficient market power to choose its product’s price, subject to the market demand curve.

Predatory Pricing

Deliberately setting prices below cost to drive rivals out of the market before raising prices later.

Limit Pricing

Setting price below the profit-maximising level but above cost to deter potential entrants or limit expansion of rivals.

Product Proliferation

Strategy where a firm offers a wide range of product varieties to crowd the market and make entry less attractive.

Profit-Maximisation Condition

The rule that profit is maximised where marginal revenue equals marginal cost and marginal cost is rising (MR = MC ↑).

Law of Returns to Scale

Long-run principle describing how output changes when all inputs are varied in the same proportion.

Spreading of Overhead

Fall in average fixed cost as fixed costs are allocated over a larger volume of output.

Geographical Concentration

Clustering of firms in the same location, enabling sharing of labour pools, infrastructure and suppliers, lowering unit costs.

Outsourcing

Contracting out certain production stages or services to specialised external firms to lower costs.

Infrastructural Bottleneck

Capacity constraints in transport, utilities or other infrastructure that raise costs when an industry expands rapidly.

Shut-down Condition

Short-run rule that a firm should cease production if price is less than average variable cost (P < AVC).