S-Cool Revision Summary

S-Cool Revision Summary

Average cost

This is the cost, on average, per unit of output produced.

Average fixed costs

This is total fixed cost divided by the output. It is the fixed cost per unit of output.

Average product

This is the quantity of output per unit of input. The 'input' is usually assumed to be labour, so we are usually dealing with the output per worker, on average.

Average revenue

This is the amount of money received, on average, for each good sold. Dividing total revenue by the quantity sold, or output calculates it. It is also the price.

Average variable cost

This is the total variable cost divided by the output. It is the variable cost per unit of output.

Break-even point

This is basically the point, or level of output, where a firm makes normal profit. Its total costs are the same as its total revenue (TR =TC).

Diminishing average returns

'Returns' here means 'product' or 'output'. Immediately after the point when diminishing marginal returns has set in, average returns are still rising, but at a slower rate. When marginal returns fall to the point when there are the same as average returns, then average returns remain constant. After this point, the continually falling marginal returns cause the average returns to 'diminish'.

Diseconomies of scale

This refers to the increase in a firm's average costs as a result of getting too big. After the benefits of economies of scale, a firm can get so big that communication breaks down and the managers may lose an element of control. This may cause the firm's average cost curve to rise.

Economic cost

This is the economists' definition of cost. It is the opportunity cost of production. Therefore, it is the value that could have been generated had the resources been employed in their next best use.

Economies of scale

Quite simply, this refers to 'economies' made by firms or industries as a result of increasing in 'scale'. In other words, as a firm gets bigger, its average cost tends to fall because of things like bulk buying, specialisation and spreading administrative costs.

External economies of scale

External economies of scale are benefits felt by a firm as a result of a factor that causes the whole industry to grow.

Factors of production

The four factors of production are land, labour, capital and entrepreneurship. They are the inputs into the production process.

Fixed costs

These are the elements of the total cost of production that do not vary as output increases. Examples include rent and office costs.

Internal economies of scale

This refers to economies of scale that are internal. They occur as a result of the firm in question growing within an industry.

Labour productivity

Labour productivity is the output per unit of labour. Sometimes it is measured in terms of output per man-hour. Productivity can also be measured in terms of factor inputs or capital.

Law of diminishing marginal returns

If a firm increases output by adding variable labour to fixed capital then eventually diminishing marginal returns (physical product of labour) will set in. In other words, at some point an extra worker will add less output to the grand total than the previous worker.

Long run

In the short run, at least one factor of production must remain constant (usually capital). In the long run, all factors of production can vary.

Marginal cost

This is the additional cost incurred by a firm as a result of producing one more unit of output.

Marginal product

This is the addition to total output produced by one extra unit of input. Again, this 'input' is usually assumed to be labour.

Marginal revenue

This is the extra revenue received as a result of selling one more unit of output.

Normal profit

This occurs when total revenue is equal to total cost (TR = TC). Effectively, it is where a firm just breaks even. Economists refer to normal profit as a firm's opportunity cost. If a firm's profits drop below this level in the long run, then the resources would transfer to a different industry (a different use) where they can earn at least normal profit.

Opportunity cost

The opportunity cost is the sacrifice when an individual chooses one set of wants over another in the situation of scarce resources. The production possibility frontier illustrates this concept well. If an economy is on its PPF and wants more non-military goods (for example), it will have to give up the production of some military goods.

Perfect competition

This is the most competitive form of market structure. Firms in perfect competition have numerous characteristics (see the topic of 'Market structure' for details). It is felt that this is the most efficient of all the market structures. Unfortunately, it is also the most unrealistic!

Perfectly elastic demand curve

This is a flat, or horizontal, demand curve. The value of the elasticity of demand is infinity. The demand for the good in question will be infinite at the given market price. All firms in perfect competition have flat demand curves.

Production possibility frontier

This is a curve that tends to be convex to the origin and shows all the possible combinations of two mutually exclusive groups of goods (military and non-military goods, for example) where all the economy's resources are being used and in the most efficient way possible. It is important that both of those conditions are fulfilled for an economy to be in a situation on rather than within its PPF.

Profit

Put simply, this is the amount of money a firm has left over when they take their costs away from their revenue. It is total revenue minus total cost.

Profit maximising level of output

This is the level of output where the difference between total revenue and total cost is greatest. At this same level of output, marginal cost is equal to marginal revenue (MC = MR). This is one of the most important formulas in A level economics!

Revenue

The revenue of a firm constitutes the receipts of money from the sale of goods and services over a given time period. It is the actual money taken in, and not the profit. It can be calculated by multiplying the price by the quantity sold.

Short run

The short run is defined as the period of time where at least one factor of production must be fixed. In the context of a firm, this is usually capital. In the real world, the actual length of time that constitutes the 'short run' depends on the industry in question. For a market trader the short run might only last for a day or two. In the nuclear industry, the 'short run' may last for years.

Super-normal profit

This refers to any profit earned by a firm that is over and above normal profit. This occurs when total revenue is greater than total cost (TR > TC). This is the layman's view of profit.

Total cost

This is the total cost to the firm of producing a given number of units.

Total product

This is the quantity of output produced by a given number of workers over a given time period.

Total revenue

This is the total receipts of money received by a firm from the sale of goods and services over a given time period.

Turnover

This is another term used meaning revenue; the receipts of money from the sale of goods and services over a given time period.

Variable costs

These are the elements of the total cost of production that do vary as output increases. Examples include raw materials and labour