4.1.4 business objectives and pricing decisions Flashcards
What are marginal costs?
How much it costs to produce one extra unit of output.
How are marginal costs calculated?
Change in Total Costs / Change in Quantity
What does the law of diminishing marginal productivity state?
That adding more units of a variable input to a fixed input increases output at first, but after a certain number of inputs the marginal increase of output becomes constant.
Then, when there is an even greater input, the marginal increase in output starts to fall.
In other words, at some point in production adding more inputs leads to a fall in marginal output, which could be due to labour becoming less efficient and less productive.
When does a firm profit maximise?
When they are operating at the price and output which derives the greatest profit.
When does profit maximisation occur?
Where Marginal Cost = Marginal Revenue
Why do some firms choose to profit maximise? [4]
- Provides greater wages and dividends
- Retained profits are a cheap source of finance, saving paying high interest rates on loans
- In short run, interests of owners/shareholders most important
- Provides stable price and output
What is normal profit?
Minimum reward required to cover all its costs and remain competitive in the market. Covers the opportunity cost of investing funds into the firm and not elsewhere.
Is when TR=TC and is considered to be a cost, so is included in costs of production.
What is supernormal profit?
The profit above normal profit. It exceeds the value of opportunity cost of investing funds into the firm and is when TR > TC.
