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Economics Unit 3 > 2 - Objectives of Firms - Perfectly Competitive Market > Flashcards

2 - Objectives of Firms - Perfectly Competitive Market Flashcards

1
Q

Total Revenue Formula

A

Units of output x price

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2
Q

If price remains the same, what happens to MR and AR?

A

They stay the same.

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3
Q

Are Price and AR the same or different?

A

Same.

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4
Q

What is MR?

A

The addition to revenue after adding one extra unit.

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5
Q

AR formula?

A

TR / Units Sold.

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6
Q

What can profits be used to judge?

A

Success of a firm

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7
Q

Where will a firm produce to maximise profit? (PROFIT MAXIMISATION)

A

Where MC = MR (shouldn’t produce beyond this else will be making loss)

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8
Q

If a firm s producing on MC = MR, what kind of profit are they making??

A

Normal Profit.

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9
Q

What is Normal Profit?

A

This is the when the firm is making just sufficient profit to continue producing that good/service.

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10
Q

What will a firm do if they are not making normal profit?

A

Leave market/transfer resources to a market where normal profit can be obtained.

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11
Q

What is supernormal profit?

A

More than the profit required that ensures the supply of a good

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12
Q

What is subnormal profit?

A

Less than that is required to ensure the supply of a good.

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13
Q

What are an economists view of normal profits?

A

1) covers the opp cost of all factors used in the process

2) Amount of profit necessary to keep factor in present occupation

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14
Q

What are an economists view of supernormal profits?

A

1) Returns are above NP’s
2) Provides incentive for firms to enter the industry
3) Signals to entrepreneurs to allocate more factors to that market.

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15
Q

What are an economists view of sub normal profits?

A

1) Indicates oversupply

2) Firms may reallocate resources elsewhere.

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16
Q

What is the traditional view of a firms interest and why has it changed?

A

Profit Maximisation

it has changed due to them having to consider things like environmental problems else they’ll lose consumers.

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17
Q

Role of shareholders? And what are the problems with managers?

A

They want to profit maximise and therefore appoint managers.

however these managers may have different objectives - their own salaries.

18
Q

What is satisficing?

A

This is when a firm does not profit maximise and settles for a satisfactory return

19
Q

Why may a firm satisfice?

A
  • To avoid a hostile bid/takeover

- Because theyre being socially responsible (carbon footprint etc)

20
Q

What is sales maximisation theory?

A

Producing to where MR=0 therefore revenues are being maximised.
(read flashcard about why firms do this._

21
Q

Why may firms be unable to profit maximise?

A

There may be problems with the information the firm needs to profit maximise.
Eg time lag between processing info therefore decision may be made too late.

22
Q

What is organisational theory?

A

Argues that a firm will satisfice when it purses a number of goals.

23
Q

What is cost plus pricing?

A

Firm doesn’t aim to maximise
They set the price = AC (normal profit) plus a conventional mark up.
Therefore level of prices = AC + mark up.

24
Q

Long Run Profit Maximisation ?

A

Sales and growth are key to future profits and managerial security.
Therefore firms wont embark on risky SHORT TERM ventures.

25
Q

Why do firms need to focus on profit?

A

Keep Shareholders happy

Avoid a takeover bid by other firms.

26
Q

How is profit achieved?

A 
Lowering costs
Reaching MES
Exploiting EofS
Increasing revenue
Increasing market share
27
Q

What are the 2 ways a firm can achieve growth?

A

INTERNAL

EXTERNAL

28
Q

What is internal/organic growth ?

A

Firms use their profit to finance expansion therefore increasing their fixed and variable factors over time.
Some say creativity and innovation are key to organic growth.

29
Q

What 2 ways can organic growth occur?

A

1) Expanding geographical reach

2) Introd new products to expand the reach of the market.

30
Q

Disadvantages of organic growth?

A

Can be a slow process.
If firm doesn’t have sufficient profit, can hinder organic growth.
If market is saturated or the strength of comp is high, can be extremely slow process.

31
Q

What is external growth?

A

Rapid way of expansion by merging or acquisitions or hostile takeover.

32
Q

What is a hostile takeover?

A

When a firm is not making enough profit and become susceptible to attack from another firm buying them out from shareholder.

33
Q

Why have a lot of mergers failed?

A
  • Diseconomies of scale because firms cant work together well enough
  • Poor leadership/communications
  • Lack of ability to change and adapt.
34
Q

What are the 4 types of mergers?

A
  • Horizontal integration
  • Vertical integration
  • Conglomerate merger
  • Lateral Merger
35
Q

What is horizontal integration?

A

2 firms at the same stage of the production process combine operations.

36
Q

What is vertical integration?

A

Firms at different stages of the production process combine.

1) Vertical backwards int - Firm combines with one at previous stage of production process.
2) Vertical forwards integration - Firm combines with firm at next prod stage.

37
Q

What is a conglomerate merger?

A

2 firms with no obvious relationship combine to increase market size/ avoid exposure / increase diversity.

38
Q

What is a lateral merger?

A

2 firms with some similarities merge.
eg Brewery and Pub
Type of horiz int.

39
Q

Compare external and internal growth.

A

TIME CONSTRAINTS - Faster to externally grow than internally.
COST - Cheaper to buy out firms than invest
ASSET STRIPPING - possible with ext growth, then can sell assets for more than bought for, therefore fast profit.
EFFICIENCY - Supposedly as a merger firms can get more done
- Not def true due to managers ambitions being different (more income personally)

40
Q

3 Components of technological change

A

Can produce more output with less input.
Completely new G/S become available.
Quality of goods increases.

41
Q

Differentiate innovation and invention

A

Invention - Completely new idea that can be patented.

Innovation - Putting an invention into commercial use (converting knowledge into ideas)

42
Q

Advantages to firms that innovate

A
  • Lowers costs
  • Have new products
  • New production techniques
  • Are dynamically efficient
  • S curve shifts to right and prices decrease.
  • Other firms may find it hard to compete due to higher costs

Economics Unit 3 (4 decks)

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