chapter 3A Flashcards
Firm definition
a business organisation that hires factors of production, combines them in productive process to produce & sell the outputs for profit
Plant (Factory) definition
the geographical location where the actual production is carried out
Industry definition
a group of firms producing g&s of the same nature
Objectives of Firms
traditional :
- profit maximising
alternative :
- market share dominance
- revenue maximisation
- growth maximisation
- profit satisficing objective
- managerial utility maximisation
Profit definition
defference between total revenue & total costs of production
Components of Total Costs
(based on opportunity costs)
implicit costs
opp. cost of using resources owned by the firm
explicit costs
opp. cost of using resources owned by other firms
Components of Total Costs
(based on types factors of production used)
total variable costs
costs that do not vary with the level of output
total fixed costs
costs that vary with the level of output
Types of Profit
- subnormal : profit < 0
- normal : profit = 0
- supernormal : profit > 0
Marginal Revenue (MR) definition
the additional revenue from the sale of one more unit of the g&s produced
Marginal Cost (MC) definition
the additional cost incurred from consuming/producing one more unit of the g&s
Short-Run vs. Long-Run
Production
short-run production
output can only be adjusted by changing the quantities of variable factors
long-run production
output can be adjusted by changing the quantities of all factors
Fixed factor / Input definition
a factor of production whose quantities cannot be changed (irrespective of the level of output)
Variable Factor / Input definition
a factor of production whose quantities cannot be changed (irrespective of the level of output)
Law of Diminishing Marginal Returns
when increasing amounts of a variable factor with a given amount of a fixed factr, there will be a point where each extra unit of the variable factor will produce less extra output than the previous unit
Internal Economies of Scale definition
the reduction in long-run average costs of production / cost advantages as a result of the expansion of the scale of production of a particular output/product for an individual firm
Types of Internal Economies of Scale
- technical (plant) eos
- firm eos
Factors leading to Internal Economies of Scale
technical (plant) eos
- specialisation & division of labour
- indivisibilities
firm eos
- marketing economies
- financial economies
- organisational economies
- mangerial economies
- risk-bearing economies
Factors leading to Internal Diseconomies of Scale
- loss of control
- lack of coordination & communication
External Economies of Scale definition
the reduction is lower average costs / cost advantages as a result of the whole industry growing in size, independent of the firm’s decisions
Types of External Economies of Scale
economies of :
- concentration
- information
- disintegration
Factors leading to External Economies of Scale
economies of concentration
- trained workforce
- better industry infrastructure
economies of information
- shared cost of research
economies of disintegration
- splitting up of the production process
Factors leading to External Diseconomies of Scale
- higher factor prices
- increased strain on infrastructure
Minimum Efficiency Scale definition
the point of lowest level of output at which the long-run average cost is at its minimum
Natural Monopoly definition
a situation where the long-run average costs would be lower if an industry were under a monopoly than if it were shared between 2 / more competitors
Measurement of Size of Firms
- legal formation
- number of shareholders
- size of capital assets
- number of employees
- sales revenue
- market share
Measurement of Industrial Concentration
- concentration ratio
Types of Growth of Firms
internal expansion
- organic growth
external expansion
- mergers & acquisition :
1. horizontal
2. vertical (backward / forward integration)
3. conglomerate
- joint ventures / alliances
Reasons for Growth of Firms
- cost motive
- monopoly power motive
- reduce uncertainty
- access to special resources
Factors determining Size of Firms
demand factors
- limited market size
- preference for specialized g&s
- subcontracting relationships
- technological disruptions in the industry
supply factors
- proportion of small & large firms in the industry
Advantages of Small Firms
- adaptability & flexibility
- niche markets
- personalised services
- cost management
- personnel management
- financial support fro the government
