Costs Revenues Profits

Question 1

What is there not in the long - run

Answer 1

There are no fixed costs in the long run all costs become variable

Question 2

What happen is a firm fails to achieve normal profit in the long run ?

Answer 2

It would cease production

As they are making an economic loss

Question 3

What do supernormal profits drive firms to do ?

Answer 3

Allocate resources most profitably (without waste )

Question 4

4 reasons why it may be difficult to increase F.O.P

Answer 4

Insufficient availability

Oop cost of expenditure

Lack of capacity

Lack of funds

Question 5

How could diminishing marginal return be overcome in the long run ?

Answer 5

Increasing the amount of capital that the firm uses, this may increase marginal returns of each additional worker

Question 6

Technical

Answer 6

Larger firms are able to purchase more better machinery and production methods to lower costs

Question 7

Financial

Answer 7

Larger firms are seen as less risky , lenders are therefore willing to lend at lower Intrest rates , reducing costs of borrowing

Eg corporate bonds

Question 8

Managerial

Answer 8

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

Question 9

Commercial , purchasing , marketing

Answer 9

Includes purchasing economies of scale ( bulk buying ) and marketing economics of scale , large firms find many forms of advertising cost effective

Question 10

Risk - bearing

Answer 10

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 )

Question 11

(Geographical ) concentration.

Answer 11

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

Question 12

Information

Answer 12

Industry may conduct r and d reducing costs for all

Question 13

When does internal economies of scale take place ? Increase in scale cannot be achieved in the long run

Answer 13

When is employs all F.OP otherwise it just growth

Question 14

What may slow creative destruction down ?

Answer 14

Copy right

Lack of knowledge

Costs

Question 15

Why is creative destruction important ?

Answer 15

Economic problem , there are limited resources these are not wasted in less efficient tech , fulfils wants and needs

Question 16

When does a firm profit maximise ?

Answer 16

Where marginal revenue = marginal cost

Question 17

What are other objectives of firms ?

Answer 17

Break even
Business growth
Increased market share
Social objectives
Sales maximisation
Revenue maximisation

Question 18

What are the 4 types of mergers/takeovers ?

Answer 18

Horizontal , forward vertical , backward vertical , conglomerate

Question 19

Why do firms choose to maximise profits ?

Answer 19

May use retained profit to pay higher wages to workers or increased dividends to shareholders

Invest in R and D , inventing new products

Question 20

Reasons in favour of contestability

Answer 20

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

Question 21

Possible barriers to entry

Answer 21

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

Question 22

What is the relationship between AR and MR?

Answer 22

MR goes down 2x faster

Question 23

100 % increase in all F.O.P employed

Answer 23

Increasing scale

Question 24

100% increase in all F.O.P

Answer 24

Increase in scale

Question 25

50% increase in output

Answer 25

Decreasing returns to scale

Question 26

200% increase in output

Answer 26

Increasing returns to scale

Question 27

Ecnomics of scale

Answer 27

Reduction in average costs as output rises

(Cost saving while scale of output increases)

Question 28

Internal eos vs external eos

Answer 28

Internal is one firm while external is a whole industry

Question 29

What happens in the short run for diminishing marginal returns to occur?

Answer 29

In short run when variable F.o.p added to a stock of fixed F.o.p total/marginal product will initially rise then fall

Question 30

When does diminishing marginal returns occur?

Answer 30

When there aren’t enough fixed F.o.p

E.g 3 ovens but 4 workers in the way of one another affecting each others output thus labour productivity fall as a result

Question 31

As long as Marginal product is positive what does this mean?

Answer 31

Next worker is going to bring more output increasing total product

Question 32

When is total product at maximum?

Answer 32

When no marginal product is left I.e it being 0