Chapter 6: Costs and revenue Flashcards
What is TR, AR and MR?
- TR=PXQ
- AR=TR/Q=P
- MR=TR/Q
What are the differences between short run and long run?
- short run: time period where the firm has at least one fixed FOP (qty can’t vary)
- long run: time period where the firm has no fixed FOPs
- short run: TC=TFC+TVC
- long run: TC=TVC
What are the short run; TC, AC,AFC,AVC and MC?
- TC=TFC+TVC
- AC=TC/Q
- AFC=TFC/Q
- AVC=TVC/Q
- MC=TVC/Q
What are the internal economies of scale?
The internal economies of scale are cost savings that a firm enjoys when it increases the scale of production, which reduces the cost of production (fall in LRAC but increase in o/p)
- marketing economies
- risk bearing economies
- financial economies
- administrative economies
- technical economies
How can marketing economies be gained?
- Bulk buying
- larger firms tend to buy larger quantities of inputs and hence are in a stronger position to negotiate discounts, lowering the AC of production - Advertising
- large firms may also benefit from lower costs of advertising as the cost per unit is low (can reduce AC while increasing o/p)
How can risk-bearing economies be gained?
When larger firms are able to better diversify through a larger product range, risks are beared more effectively as cost of uncertainty is spread over a larger output thus lowering AC
How can financial economies be gained?
When large firms have more assets they can pledge to banks as collateral, it is less risky and easy for them to borrow money from banks at more favourable interests rates
How can administrative economies be achieved?
As a firm grows larger, professionals can be hired to specialise in specific areas of work to improve decision making and efficiency
How can technical economies be achieved?
when production process is broken down, workers work more efficiently as they specialise in their tasks which increases the amount of output in a given period of time and thus lower average COP
