Costs Revenues Profits Flashcards
What is there not in the long - run
There are no fixed costs in the long run all costs become variable
What happen is a firm fails to achieve normal profit in the long run ?
It would cease production
As they are making an economic loss
What do supernormal profits drive firms to do ?
Allocate resources most profitably (without waste )
4 reasons why it may be difficult to increase F.O.P
Insufficient availability
Oop cost of expenditure
Lack of capacity
Lack of funds
How could diminishing marginal return be overcome in the long run ?
Increasing the amount of capital that the firm uses, this may increase marginal returns of each additional worker
Technical
Larger firms are able to purchase more better machinery and production methods to lower costs
Financial
Larger firms are seen as less risky , lenders are therefore willing to lend at lower Intrest rates , reducing costs of borrowing
Eg corporate bonds
Managerial
Large firms are able to employ specialist staff such as accountants and Human Resources
whilst a manager in a small business may have to do all those things in a small business productivity of specialists is higher thus average costs are lower
Commercial , purchasing , marketing
Includes purchasing economies of scale ( bulk buying ) and marketing economics of scale , large firms find many forms of advertising cost effective
Risk - bearing
By operating in different markets large firms are able to spread the cost of failure
( diversity of products , eg diffrent flavours of Fanta , thus they could still make a profit if it goes wrong )
(Geographical ) concentration.
An area known for products build skilled workforce , a reputation and local colleges may offer training while suppliers have an increase incentive to move in close by.
Infrastructure may be improved
Information
Industry may conduct r and d reducing costs for all
When does internal economies of scale take place ? Increase in scale cannot be achieved in the long run
When is employs all F.OP otherwise it just growth
What may slow creative destruction down ?
Copy right
Lack of knowledge
Costs
Why is creative destruction important ?
Economic problem , there are limited resources these are not wasted in less efficient tech , fulfils wants and needs
When does a firm profit maximise ?
Where marginal revenue = marginal cost
What are other objectives of firms ?
Break even
Business growth
Increased market share
Social objectives
Sales maximisation
Revenue maximisation
What are the 4 types of mergers/takeovers ?
Horizontal , forward vertical , backward vertical , conglomerate
Why do firms choose to maximise profits ?
May use retained profit to pay higher wages to workers or increased dividends to shareholders
Invest in R and D , inventing new products
Reasons in favour of contestability
Number of firms is irrelevant
Firms compete with each other and do not collude
Firms are short run profit maximisers
Goods may be homogeneous (same-type) or differentiated
Perfect knowledge exists
Possible barriers to entry
Large set up costs
Sunk costs - costs that can never be recovered (may prevent firms from making normal profit )
Economies of scale
Natural cost advantages
Legal barriers - licences , patent etc
Marketing barriers and branding
What is the relationship between AR and MR?
MR goes down 2x faster
100 % increase in all F.O.P employed
Increasing scale
100% increase in all F.O.P
Increase in scale
