5-2 Review: Costs of Production

1. The level of production at which a

business realizes its greatest amount

of profit is: where MC=MR

2. Variable cost: costs that vary based on

the level of production output

3. Fixed cost: costs the business owner

incurs no matter how much they produce

4. Total Revenue= income a business

receives from selling its products; TR= P x

Q

5. Marginal cost: MC=change in total cost /

change in total product

6. Increasing returns: when hiring new

workers causes the marginal product to

increase

7. Diminishing returns: when hiring new

workers causes marginal product to

decrease

8. Define monopoly.

• Market structure in which only one seller

sells a product for which there are no

close substitutes

9. Explain how prices of goods/services

are affected by a monopoly.

• Business is a price maker and consumers

accept that price

10. Define natural monopoly.

• Occurs when the costs of production are

lowest with only one producer

11. Define technological monopoly.

• Occurs when a firm controls a

manufacturing method, an invention, or a

type of technology

12. Define economies of scale.

• When the average cost of production falls

as the producer grows larger

13. Explain what nonprice competition is

and give an example.

• Anything other than lowering price such as

advertising or giveaways

14. Name the 4 characteristics of

monopolistic competition.

– Many sellers and many buyers

– Similar but differentiated products

– Limited control of prices

– Freedom to enter or exit the market

15. Name the 2 types of products an

oligopolist is likely to sell.

• Standard AND differentiated products

16. Explain the purpose of antitrust

legislation.

• To breakup companies (monopolies) that

have become too large

17. Define merger.

• When two firms join together to become

one large firm

18. Define deregulation.

• Reducing or removing government control

of a business

19. Name the 4 characteristics of

oligopolies.

– Few sellers and many buyers

– Standardized or differentiated products

– More control of prices

– Little freedom to enter or exit market

20. Name the 5 characteristics of perfect

competition.

– Numerous buyers and sellers

– Standardized product

– Freedom to enter and exit markets

– Independent buyers and sellers

– Well-informed buyers and sellers

21. In monopolistic competition how do

sellers attract consumers?

• Product differentiation and nonprice

competition

22. You want to start your own smoothie

store located in a nearby mall. This is

an industry where monopolistic

competition exists. Explain in detail

how you would make your business a

success according to the following

factors: product differentiation,

nonprice competition, prices, and

expenses.

1. Define business organization.

• Enterprise that produces goods or

provides services in order to make a profit

2. Why can partnerships have limited

life?

• When a partner dies, retires, or leaves, the

partnership ends

3. Name the advantages of a sole

proprietorship.

–Easy to open and close

–Few regulations when compared to

other types of businesses

–Freedom and control

–Owner keeps profits

4. Define sole proprietorship.

• Business owned and managed by one

person

5. Define partnership.

• Business co-owned by 2 or more people

6. Define limited partnership.

• Partnership in which 1 person is not

actively involved in the day-to-day running

of the business

7. Define public corporation.

• Corporation that issues stock that can be

freely bought and sold

8. What are the disadvantages of

corporations?

–High start-up cost and effort

–Heavy regulations

–Double taxation

–Loss of control to the board of directors

9. You want to start a business. Tell me

what type of business organization you

would choose and what two

advantages of this business-type are.

(Sole proprietorship, corporation, or

partnership).

10. Define stockholder.

• Acquire ownership in a corporation

through purchasing stock

11. Explain what dividends are.

• Part of the profit paid to stockholders

12. Explain the difference between a

horizontal and vertical merger.

–Horizontal merger: when 2 companies

that produce the same product merge

–Vertical merger: when 2 companies

involved in different steps of

marketing/producing a specific product

merge

13. How are stocks and bonds different?

• Stocks represent ownership in a

corporation; bonds do not—they are paid

back to the holder after a set period of

time with interest

14. Define franchise.

• Business made up of semi-independent

businesses that offer the same products or

services

15. Define cooperative.

• Business operated for the shared benefit

of its owner, who are also its customers

16. What is a conglomerate?

• Merger of companies that produce

unrelated products