section 3 definitions

Question 1

What is profit maximisation?

Answer 1

When firms produce at a point which derives the greatest profit; MC=MR

MC stands for marginal cost and MR stands for marginal revenue.

Question 2

What does sales revenue maximisation mean?

Answer 2

When firms produce at a point which derives the greatest revenue; MR=0

MR refers to marginal revenue.

Question 3

Define sales volume maximisation.

Answer 3

When firms produce at a point where they sell as many of their goods and services as possible without making a loss; AR=AC

AR stands for average revenue and AC stands for average cost.

Question 4

What is the goal of growth maximisation?

Answer 4

When firms aim to increase the size of their market share, for example through mergers

Growth can also involve expanding product lines or entering new markets.

Question 5

What does utility maximisation refer to?

Answer 5

When firms aim to maximise social utility

This often involves considering the welfare of consumers and society.

Question 6

Define profit satisficing.

Answer 6

When a firm earns just enough profit to keep its shareholders happy

This approach may prioritize stability over aggressive profit maximisation.

Question 7

What is corporate social responsibility (CSR)?

Answer 7

When firms take responsibility for consequences on the environment and behave more ethically

CSR initiatives can include sustainable practices and community engagement.

Question 8

What is the principle-agent problem?

Answer 8

Where the agent makes decisions on behalf of the principle; the agent should maximise the benefits of the principle but has the temptation of maximising their own benefits

This conflict can lead to inefficiencies and misaligned interests.

Question 9

Define conglomerate integration.

Answer 9

The merger of firms with no common connection

This strategy can diversify a firm’s operations and reduce risk.

Question 10

What is horizontal integration?

Answer 10

The merger of firms in the same industry at the same stage of production

This can lead to increased market share and reduced competition.

Question 11

Define vertical integration.

Answer 11

When a firm merges or takes over another firm in the same industry, but at a different stage of production

This can enhance control over the supply chain.

Question 12

What does diversification mean?

Answer 12

When firms grow by expanding their production through increasing output, widening their customer base, developing a new product or diversifying their range

Diversification can reduce risk by spreading investments across different areas.

Question 13

What is meant by the long run in economics?

Answer 13

The length of time when all factors are variable

In the long run, firms can adjust all inputs to production.

Question 14

Define the short run.

Answer 14

The length of time when at least one factor of production is fixed

In the short run, firms cannot change all inputs, leading to different cost structures.

Question 15

What is total cost (TC)?

Answer 15

The cost to produce a given level of output

TC includes both fixed and variable costs.

Question 16

What are total fixed costs (TFC)?

Answer 16

Costs which do not vary with output

Examples include rent and salaries.

Question 17

Define total variable costs.

Answer 17

Costs which change with output

Examples include raw materials and labor directly involved in production.

Question 18

What is average cost/average total cost (AC/ATC)?

Answer 18

The cost of production per unit

AC is calculated by dividing total cost by the number of units produced.

Question 19

What are sunk costs?

Answer 19

Costs that can’t be recovered once they have been spent

Sunk costs should not influence future investment decisions.

Question 20

What is the law of diminishing returns?

Answer 20

If a variable factor is increased when another factor is fixed, there will come a point where each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal output falls

This principle is crucial in production theory.

Question 21

Define internal economies of scale.

Answer 21

An advantage that a firm is able to enjoy because of growth in the firm, independent of anything happening to other firms or the industry in general

Examples include bulk buying and improved technology.

Question 22

What are external economies of scale?

Answer 22

An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself

Examples include improved infrastructure and supplier networks.

Question 23

What are economies of scale?

Answer 23

The advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business

This can lead to competitive pricing and higher profit margins.

Question 24

Define diseconomies of scale.

Answer 24

The disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

This can occur due to management challenges and communication issues.

Question 25

What are **increasing returns to scale**?

Answer 25

An increase in inputs by a certain proportion will lead to an increase in output by a larger proportion ## Footnote This can enhance profitability as production scales up.

Question 26

Define **decreasing returns to scale**.

Answer 26

An increase in inputs by a certain proportion will lead to output increasing by a smaller proportion ## Footnote This indicates inefficiencies in production.

Question 27

What are **constant returns to scale**?

Answer 27

Output increases by the same proportion that the inputs increase by ## Footnote This reflects a balanced production process.

Question 28

What is **minimum efficient scale**?

Answer 28

The lowest level of output necessary to fully exploit economies of scale ## Footnote Achieving this scale is crucial for competitive pricing.

Question 29

What is **total revenue (TR)**?

Answer 29

Revenue generated from the sale of a given level of output ## Footnote TR is calculated as price multiplied by quantity sold.

Question 30

Define **average revenue (AR)**.

Answer 30

The price each unit is sold for ## Footnote AR is often equal to the price in perfect competition.

Question 31

What is a **loss** in economic terms?

Answer 31

When revenue does not cover costs ## Footnote This situation can lead to business closure if persistent.

Question 32

What is **accounting profit**?

Answer 32

Total monetary revenue minus total monetary costs ## Footnote This does not consider opportunity costs.

Question 33

Define **supernormal profit**.

Answer 33

The profit above normal profit, TR>TC ## Footnote Supernormal profits indicate a firm's competitive advantage.

Question 34

What is **normal profit**?

Answer 34

The minimum reward required to keep entrepreneurs supplying their enterprise, the return sufficient to keep the factors of production committed to the business; TC=TR ## Footnote Normal profit is considered a cost of production.

Question 35

Define **economic profit**.

Answer 35

Profit which considers the opportunity cost of production as well as monetary costs ## Footnote Economic profit provides a more comprehensive view of profitability.