4A Cost & Revenue Flashcards
What are plants, firms, & industries
Plant - Production or distribution of a product
Firm - Decision making unit, hires FOP creates & sells output
Industry - Collection of firms producing similar goods & services
What are FOP
- Fixed factors
- Variable factors
Fixed - CANNOT be increased/decreased in qty within given time period (land, machines)
Variable - CAN be increased/decreased in qty within given time period (labour, raw materials)
What r the 2 time periods in pdn
Short run -> at least 1 fixed factor
TC = TFC + TVC
Long run -> all factors varied
TC = TVC
What r the 2 costs
Explicit -> Opp. Costs of resources/FOP not owned by firm
Implicit -> Opp. cost of resources/FOP already owned by firm + vost of uncertainty
What r short run pdn costs?
TFC - Constant, doesnt vary w output eg. rent
TVC - Varies directly w output eg. wages
TC - Total COP, TFC + TVC
AC - Cost per unit of output
AFC - fixed cost/unit of output (falls over large output, spreading overhead cost)
AVC - Variable cost per unit of output due to law of diminishing marginal returns
MC - Total cost result producing additional unit of output
What are the assumptions in LRAC curve?
In LR ->AC = AVC , no AFC
- Factor prices are constant
- State of technology constant
- Firm can choose least-cost combination of factors to produce any given lvl of output
- LR costs of firms influenced by economies of scale & diseconomies of scale
Describe iEOS
Cost advantages a firm experiences as increases its scale of production (movement in LRAC curve)
Sources of iEOS
- Spreading out of FC & productivity improvements
- Expensive capital inputs
- Cost of indivisible input is spread over large qty of output - Specialisation of labour
- Increase efficiency of labour, less time lost, less training needed - Employment of expertise
- Greater efficiency from professionals - Expensive advertising
- Total advertising cost spread over larger output
Greater buying power over inputs eg. buying in bulk offer discount on purchase to secure orders
Describe iDOS
Cost disadvantages to firm as it increases scale of production
(Movement in upward sloping LRAC curve)
- Fall in productivity due to expansion
-> Conflicting objectives, communication breakdowns, difficulty in monitoring different operations (inefficiency) - Low morale of employees
Needs not met, affecting morale lower productivity
(Might be Funding issues ->borrow too heavily, charged high interest, increase AC or
Marketing issues -> Difficulty finding sufficient demand for commodity it produces, only possible thru huge expenditure on advertising)
Describe eEOS
Cost advantages firm enjoys as size of whole industry increases
Downward SHIFT in LRAC
Source:
Sharing of common resources due to industry expansion
- Development of amenities & infrastructure hence lower AC individual firms production increase
- Supply of industry specific skilled labour
- R&D
- Outsourcing of prodn processes to supporting firms due to industry expansion
Describe eDOS
eDOS are cost disadvantages a firm experiences as industry expands as a whole
Upward shift in LRAC
- Infrastructural bottlenecks
Overcrowding, air pollution -> Taxes & Fines, hence loss in man-hours - Increased competition for common inputs
Industry grows, increased demand for industry specific factors as pdn leads to shortage, higher prices higher AC
Describe Firm revenue
P*Q firms earn when selling output
Ability for firm to influence price depends on degree of mkt power
MKT power depends on availability of substitutes & BTE
Describe mkt power
Describe BTEs
Anything that prevents entry of new firms into an industry and limiting competition faced by existing firms.
Natural:
EOS
Ownership of essential resources
Huge Start up cost
State created:
Licenses
Patents, copyrights
Firm created
Advertising
Product proliferation
Predatory pricing & limit pricing
Restrictive practices
Describe natural BTEs
Describe state created BTEs
