4.1.3 Business objectives and pricing decisions Flashcards

1
Q

AC, AR and profit

A

Average cost : total costs / quantity sold

Average revenue: total revenue / quantity sold

Profit = Total revenue - total costs

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2
Q

marginal costs and revenue equation

A

TC (n) - TC (n-1) = marginal costs

Marginal revenue = TR (n) - TR (n-1)

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3
Q

what is marginal cost and revenue and importance

A
  • Cost of pridcing one more unit of output
  • Marginal revenue: extra revenue that comes from selling one more unit of output
  • Important as this is how firm decide on how much production they should do
  • Perfect competition: producing more or less does not affect prices
  • Oligopoly: producing more increases supply and prices drop; need to estimate drop in prices and effect on revenue
  • Can have increased control over market if market power is significant

Profit is maximised when marginal costs = marginal revenue

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4
Q

contribution and profit

A

Contribution → revenue from each extra unit sold - variable costs
Profit = (contribution x quantity demanded) - fixed costs

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5
Q

pricing strategies due to firm objectives

A
  • Sales maximisation: penetration into mass markets, competitive pricing or cost plus pricing
    1. Small businesses have less choice than bigger firms

Profit maximisation: will consider price skimming, or premium pricing
1. New or innovative products
2. Firm targeting new market
3. First movers have advantage (choice)

  • Market power: predatory pricing to drive out competitors, but illegal
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6
Q

Minimum efficient scale

A
  • Minimum efficient scale: average costs at their lowest point, leading to productive efficiency
  • Before this point, economies of scale outweigh DEOS
  • After this point, DEOS>EOS
  • Some firms may want to operate after MES as they can have a larger output and market share → this gives them monopolistic power over price etc
  • Diseconomies of scale can be tackled with rotation, fringe benefits, job enrichment etc
  • Constant return to scale: costs are constant
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