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
2
Q
marginal costs and revenue equation
A
TC (n) - TC (n-1) = marginal costs
Marginal revenue = TR (n) - TR (n-1)
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
4
Q
contribution and profit
A
Contribution → revenue from each extra unit sold - variable costs
Profit = (contribution x quantity demanded) - fixed costs
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
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
