Cost, revenue Flashcards
Explain the shape of MP/MC
- As more variable factor is added, initially MP rises, firms benefits from division of labour, specialisation, increase in efficiency, increase in MARGINAL RETURNS
- labour to capital ration increases, diminishing marginal returns
Link MP with TP
when MP is rising, TP is rising
when MP is highest, steepest gradient of TP
when MP=0, TP max.
MP negative, TP falls
Link MP with AP
MP>AP, AP rises (increasing average returns)
MP
What is the law of diminishing returns?
As more of a variable FOP (labour) is employed with a fixed FOP (capital), a point will be reached where MP will decline. This will cause TP to rise by a DIMINISHING amount
Link MC with TC, VC
When MC is low, costs are rising slowly, so VC and TC has shallower gradient. When MC is high, costs are rising quickly, so gradient of VC and TC is steeper
Why MC falls as MP rises?
- MP=change in TP/change in Q (L)
- TP rises at faster rate than rise in labour, due to increasing marginal return due to economic reasons
- MC=change in TC/change in Q
- TC rises as more labour employed, but Q produced increases at faster rate than rise in TC, due to increase in productivity and efficiency.
ATC is also known as?
AC, SRAC (short run average cost curve)
Explain the relationship between ATC, AFC and AVC
ATC=AFC+AVC, when both of AFC and AVC is falling due to increasing marginal return, ATC falls, the impact on ATC depends on the relative strength.
— as output increases, the rise in AVC outweigh the fall in AFC, ATC begins to rise
— the gap between AVC and ATC is AFC
Explain the relationship between MC and ATC, MC and AFC?
If MC>ATC, ATC rises. When MC is low, costs are rising slowly so AVC and ATC has shallower gradient, when MC is high, costs are rising quickly so steeper gradient. Therefore, MC cuts AVC and ATC at their LOWEST POINTS
MC is unrelated to AFC since MC measures changes in costs and FC does not change with output.
Link MC with AVC
Reflection of MP and AP
when MCAVC, AVC rises, (decreasing average returns)
MC cuts through bottom of AVC
What is the link between diminishing returns and economies of scale?
- diminishing returns in SR
- EoS in LR
Explain the shape of LRAC diagram
As the firm expand in size, falling AC until it achieves optimal size, productive efficiency* is maximised — LRAC minimised — Any further increase in scale of production leads to falling efficiency and rise in AC
What is return to scale? What does it indicate?
A ratio of change in inputs to the change in output (in %)
With increasing returns to scale, this leads to falling AC, leads to EoS
What is minimum efficient scale (MES)?
- the lowest level of output where LRAC is minimised
What is meant by a high MES?
- industry dominated by a small number of large firms
- only large firms can obtain maximum efficiency, smaller firms competed out
- high barriers to entry, firms producing low output will not be able to compete
- uncontestable market, competition restricted
What is meant by a low MES?
- large no. of firms
- max. efficiency can be gained by small firms at lower output
- EoS will not be a particular barrier to entry
- industry is more contestable and more competitive
What is EoS?
Falling in LRAC as output increases
What are some types of EoS?
- technical
- purchasing
- marketing
- managerial
- technological
- financial
- risk-bearing
What are some types of internal DoS?
- lack of coordination
- lack of control (hierarchy)
- lack of communication
- demotication
How to avoid DoS?
1) HR management
- improvements in recruitment, training
2) performance related pay schemes (PRP)
3) Outsourcing
- reducing costs whilst retaining control over production, but may impact on job security
What are some types of external EoS?
- investment in R&D
- investment in transport infrastructure
- agglomeration
- tax
- labour cost
Where is max profit on TC, TR curve, how is profit max condition derieved
- biggest distance between TC and TR
- MC=MR (D)
Why demand curve differ between price taker and price maker? (D and R)
Price taker
- demand curve is perfectly elastic cuz they receive the same price for every output
Price maker
- demand curve is downward sloping, can set either price or quantity
The differences in the relationship between TR and D, for price taker and price maker, the elasticity of the D curve
Price taker
- revenue=quantity x price, MR=AR=D and equals to market price, TR increases by constant amount
Price maker
- highest point on TR = 0 MR, unitary PED on AR
- TR rises then falls, as P falls, TR rises, implies % fall in price < % rise in Qd, D is PED elastic up to when MR=0 at max.TR
- as P continues to fall, TR falls, % increase in Qd < % fall in P, PED inelastic
- TR decreasing suggests MR negative
What is normal profit (transfer earnings), abnormal profit (economic rent) and subnormal profit? Condition of each type is made?
Normal: AR=AC, the minimum amount of profit required to keep a firm operating in the industry
Abnormal: AR>AC, any profit made over and above normal profit
Subnormal: AR
