Microeconomic Definitions
Short Run; When at least one factor of production is fixed which tends to be capital
Long Run; When all the factors of production are variable
Fixed Costs; A cost that remains the same whatever the level of output e.g. insurance or rent
Variable Costs; A cost that changes depending on the level of output e.g. raw materials
Total Costs; Fixed costs plus variable costs
Marginal Costs; The extra cost of producing one more unit of output
The Law of Diminishing Returns; As more units of labour are used, marginal output will rise than fall
Marginal Product; The extra output of employing one extra unit of labour
Minimum Efficient Scale (MES); The level of output where economies of scale are fully exploited
Economies of Scale; As output increases the production cost per unit decreases
Specialisation; As a firm grows they can employ specialist workers who will increase productivity and
therefore reduce cost per unit
Price Taker; A company that must accept the prevailing prices in the market of its products as its
own transactions being unable to affect the market price
Allocative Efficiency; Occurs when the economy/businesses produce only goods and services that
are most desirable in the society and in high demand; P=MC or AR=MC
Productive Efficiency; Occurs when all resources are being used to maximum efficiency and is
illustrated on a PPF or at the MES point
Dynamic Efficiency; When firms invest abnormal profits in research and development to develop
new products or new processes/production techniques in order to reduce their long run average
cost
Barriers to Entry; Obstacles that make it difficult for new firms to enter and compete in a given
market
Price Discrimination; When a firm charges different prices for the same product to different groups
of consumers for reasons other than costs
Perfect Price Discrimination; When a firm separates the market into each individual consumer and
charge the price they are each able and willing to pay therefore allowing the firm to extract all
consumer surplus and turn it into extra revenue
Second Degree Price Discrimination; When a business sells a product at a lower price because they
have surplus capacity e.g. hotel rooms
Short Run; When at least one factor of production is fixed which tends to be capital
Long Run; When all the factors of production are variable
Fixed Costs; A cost that remains the same whatever the level of output e.g. insurance or rent
Variable Costs; A cost that changes depending on the level of output e.g. raw materials
Total Costs; Fixed costs plus variable costs
Marginal Costs; The extra cost of producing one more unit of output
The Law of Diminishing Returns; As more units of labour are used, marginal output will rise than fall
Marginal Product; The extra output of employing one extra unit of labour
Minimum Efficient Scale (MES); The level of output where economies of scale are fully exploited
Economies of Scale; As output increases the production cost per unit decreases
Specialisation; As a firm grows they can employ specialist workers who will increase productivity and
therefore reduce cost per unit
Price Taker; A company that must accept the prevailing prices in the market of its products as its
own transactions being unable to affect the market price
Allocative Efficiency; Occurs when the economy/businesses produce only goods and services that
are most desirable in the society and in high demand; P=MC or AR=MC
Productive Efficiency; Occurs when all resources are being used to maximum efficiency and is
illustrated on a PPF or at the MES point
Dynamic Efficiency; When firms invest abnormal profits in research and development to develop
new products or new processes/production techniques in order to reduce their long run average
cost
Barriers to Entry; Obstacles that make it difficult for new firms to enter and compete in a given
market
Price Discrimination; When a firm charges different prices for the same product to different groups
of consumers for reasons other than costs
Perfect Price Discrimination; When a firm separates the market into each individual consumer and
charge the price they are each able and willing to pay therefore allowing the firm to extract all
consumer surplus and turn it into extra revenue
Second Degree Price Discrimination; When a business sells a product at a lower price because they
have surplus capacity e.g. hotel rooms
