3.1-4.2 Flashcards
Explain Profit maximisation and draw the diagrams for profit max in a monopoly and perfect competition
> Profit Max: MR=MC
-Normal profit: Minimum reward required to keep entrepreneurs supplying their enterprise.
-Supernormal: Profit above normal profit, when TR>TC.
Explain other other maximisation objectives( DRAW AND DIAGRAM WHICH REPRESENTS PM,RM,SM)
> Sales revenue:Revenue maximisation occurs when MR = 0.
Sales volume maximisation:When firm aims to sell as much of their goods and services as possible without making a loss. AC=AR.
Growth Maximisation: firm may be willing to make lower levels of profit in order to increase in size and gain more market share.
Utility: When consumers aim to generate the greatest utility possible from an economic decision.
Explain non maximising objectives:
> Profit satisficing: A situation where there is a separation of ownership and control in a firm.
-Example of principal agent problem: Linked to theory of asymmetric information. This is when agent makes decisions for principal, but agent is inclined to act in their own interests, rather than those of the principal.
Social Welfare:Firm may not be motivated by money but may seek to offer a service to the local community.
Corporate social responsibility( CSR):when companies integrate social and environmental concerns into their business operations
Explain and calculate:Fixed, variable, total, average
> Fixed costs are costs which do not vary with output. For example, rents, advertising and capital goods are fixed costs. They are indirect.
Variable costs change with output. They are direct costs
Total cost is the cost to produce a given level of output and is calculated by:
Total costs = total variable costs + total fixed costs.
Average costs is the cost per unit and is calculated by:
Average costs = total costs / quantity produced Marginal cost is the cost of producing one extra unit.
Explain: Short run and long run in terms of fixed and variable factors
> In the short run, at least one factor of production cannot change. This means there are some fixed costs.
> In the long run, all factor inputs can change. This means all costs are variable. For example, the production process might move to a new factory or premises, which is not possible in the short run.
Explain with the aid of a diagram: law of diminishing returns
Diminishing returns occur in the short run when one factor is fixed (e.g. capital)
If the variable factor of production is increased (e.g. labour), there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product.
This is because, if capital is fixed, extra workers will eventually get in each other’s way as they attempt to increase production.
Explain, with the aid of a diagram:Internal and external economies of scale
> Internal economies of scale:
occur when a firm becomes larger. Average costs of production fall as output increases.
External economies of scale:occur when a whole industry grows larger and firms benefit from lower long-run average costs.
Explain, with the aid of a diagram: Diseconomies of Scale
> Occur when output passes a certain point and average costs start to increase per extra unit of output produced
Explain, with the aid of a diagram:
This is the minimum point of output necessary to achieve the lowest A.C. on the LRAC. In the above diagram, the MEC is at Q1.
Minimum efficient scale corresponds to thelowest point on the long run average cost curveand is also
Explain Returns to scale
-As a firm expands it receives increasing returns to scale.
Returns to scale refers to the change in output of a firm after an increase in factor input.
Constant returns to scale are when output increases by the same amount that input increases by.
What are the causes of economies of scale?(Really Fun Mums Try Making Pies)
Risk-bearing: When a firm becomes larger, they can expand their production range. Therefore, they can spread the cost of uncertainty. If one part is not successful, they have other parts to fall back on.
Financial: Banks are willing to lend loans more cheaply to larger firms, because they are deemed less risky. Therefore, larger firms can take advantage of cheaper credit.
Managerial: Larger firms are more able to specialise and divide their labour. They can employ specialist managers and supervisors, which lowers average costs.
Technological: Larger firms can afford to invest in more advanced and productive machinery and capital, which will lower their average costs.
Marketing: Larger firms can divide their marketing budgets across larger outputs, so the average cost of advertising per unit is less than that of a smaller firm.
Purchasing: Larger firms can bulk-buy, which means each unit will cost them less. For example, supermarkets have more buying power from farmers than corner shops, so they can negotiate better deals.
Explain the causes of diseconomies of scale
> Control: It becomes harder to monitor how productive the workforce is, as the firm becomes larger.
Coordination: It is harder and complicated to coordination every worker, when there are thousands of employees.
Communication: Workers may start to feel alienated and excluded as the firm grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation.
Explain and calculate:Total, average and marginal revenue
> Total revenue (TR): This is the total income a firm receives. This will equal price × quantity.
> Average revenue (AR) = TR / Q. It is the price each unit is sold for.
> Marginal revenue (MR) = the extra revenue gained from selling an extra unit of a good.
Explain and calculate: Profit/loss
> Profit = Total revenue (TR) – total costs (TC) or (AR – AC)× Q.
> Losses: A firm makes a loss when they fail to cover their total costs.
Explain :Accounting, normal and supernormal profit
> Normal profit: Minimum reward required to keep entrepreneurs supply their enterprise. When TR=TC.
> Supernormal profit:Profit above normal profit. TR>TC
> Accounting profit:calculated by the total monetary revenue minus total costs
