3B Flashcards
Marginal revenue
change in TR/change in quantity
What is a price taker
A firm in a competitive market that has to accept the market price.
Characteristics of perfect competition
Very many consumers-infinite
very many, similarly sized firms-infinite.
Identical product homogenous.
perfect info about price.
price maker
A firm that has control over the market price
Relationship between AR and MR
MR half
Fixed cost
Costs that don’t change with output
Variable costs
Costs that change with output
Average total cost
TC/quantity
Marginal cost
change in TC / change in Q
Law of diminishing returns
If a firm increases its inputs of one FoP while other factors are fixed, it will eventually lead to less extra product from the variable factor.
Short-Run
The period when a firm can only vary the input of one of its factors of production eg labour, but faces a fixed input of the others.
Long-Run
The period when a firm can vary the inputs of all its factors of production
Economies of scale
Where an increase in the size of firms level of output leads to lower long-run average costs.
Purchasing EoS
these give lower LRAC due to higher bulk buying of inputs into a business eg fuel and vehicles, key customer can negotiate higher discount so Lower LRAC
Managerial and marketing Eos
As a firm expands the same number of managers are likely to be able to still manage the firms for a range of output levels- so LRAC of those managers falls.
Risk-bearing Eos
Often gained by larger firms that can bear risks more, some investments are very expensive or risky, only a large firm will be W and A to undertake the investment e.g into R and D which may lead to lower LRAC
Financial EoS
These are the cost savings that large firms may receive when borrowing money, a larger firm may get a lower ir on borrowed funds as risk of lending is lower.
Technical and transport EoS
These often come from i increased capacity use or a now viable technological development that results in lower LRAC.
e.g containerisation
Minimum efficient scale
The level of output where LRAC stops following as output increases
Diseconomies of scale
When an increase in the level of output leads to higher LRAC
Internal EoS
Economies of scale that arise from expansion of a single firm
External EoS
Economies of scale that arise from expansion of the whole industry.
Productive efficiency
Where production takes place using the least amount of scarce resources, producing at minimum AC
Allocative efficiency
When society is producing an appropriate bundle of goods relative to consumers preferences
Dynamic efficiency
An increase in AE or PE in the long-run due to an increase in innovation or technical progress.
X-inefficiency
When a firm lacks the incentive to keep costs down so is not working at minimum LRAC
Reasons for X-inefficiency
-organisational stock
-a lack of motivation of management
-Actual costs are higher than attainable/potential costs.
Normal profit
Profit that covers the opp cost of capital and is just sufficient to keep the firm in the market
SNP
Profit that is greater than normal profit
Marginal revenue
The additional revenue gained by a firm from selling an additional unit of output
Satisficing
Where a manager aims to produce satisficing results for the firm, eg i the forms of profit, rather than trying to maximise them
advantages of satisficing
-some profits to keep shareholders happy
-Profit without taking unnecessary risks.
-Possible benefits to society
disadvantages of satisficing
-less profit for shareholders
