Firms And Customers

Question 1

What can affect the success of a firm?

Answer 1

It’s pricing and production decisions

Question 2

What can affect the costs that a firm incurs?

Answer 2

It’s scale of production and the production technology that it has.

Question 3

Why can large firms be more profitable than small firms?

Answer 3

They have more money to access technological advancements sooner, and they have cost advantages because they can buy in bulk to decrease costs.

Question 4

If inputs increase by a given proportion, production can react in one of three ways. What are these three reactions, and what does it mean for the technology?

Answer 4

Production increases more than proportionality, then technology exhibits increasing returns to scale in production (economies of scale)
Production increases proportionally, then technology exhibits constant returns to scale in production
Production increases less than proportionality, then technology exhibits decreasing returns to scale in production (diseconomies of scale)

Question 5

What does economies of scale include?

Answer 5

Cost advantages: large firms can purchase inputs on more favourable terms because they have greater bargaining power
Demand advantages: network effects, as value of output rises with number of users

Question 6

What is an example of something that can cause large firms to suffer diseconomies of scale?

Answer 6

Having too many employees would lead to the firm needing to employ additional layers of bureaucracy

Question 7

What do cost functions show?

Answer 7

How production costs vary with the quantity of output produced

Question 8

How is average cost per unit calculated?

Answer 8

Average cost is calculated as the slope of the rate from the origin to a given point on the cost function

Question 9

What is marginal cost and how is it calculated?

Answer 9

The change of the total cost to produce one extra unit of output.
It is calculated as the slope of the cost function at a given point.
(Go forwards not backwards)

Question 10

Finish this statement: if AC>MC…

Answer 10

Then AC is always decreasing

Question 11

Finish this statement: if MC > AC…

Answer 11

Then AC is always increasing

Question 12

When does the MC curve intersect the AC curve?

Answer 12

The MC curve always intersects the AC curve at its lowest point

Question 13

What is the demand curve?

Answer 13

The quantity of an output that consumers will buy at a given price point

Question 14

How can firms estimate their demand curve?

Answer 14

Theoretically they can estimate their demand curve by surveying a large number of customers

Question 15

What is the formula to calculate economic profit?

Answer 15

Economic profit = total revenue - total costs

Question 16

What do isoprofit curves show?

Answer 16

Price / quantity combinations that give the same profit

Question 17

What is marginal revenue?

Answer 17

The change in revenue from selling an additional unit

Question 18

How can a firm maximise profit?

Answer 18

By choosing to sell at a point where maximum revenue = maximum costs

Question 19

What is customer surplus?

Answer 19

The total difference between willingness-to-pay and purchase price

Question 20

What is producer surplus?

Answer 20

The total difference between revenue and marginal costs

Question 21

What is total surplus?

Answer 21

The total gains from the trade

total surplus v consumer surplus + producer surplus

Question 22

What is deadweight loss?

Answer 22

the loss of total surplus relative to a Pareto efficient allocation (unexploited gains from the trade)

Question 23

When is total surplus largest?

Answer 23

demand = marginal cost

Question 24

What does a firm’s pricing decisions rely on?

Answer 24

the slope of the demand curve

Question 25

What is the price elasticity of demand?

Answer 25

the degree of responsiveness of consumers to a price change

Question 26

What is the formula for price elasticity of demand?

Answer 26

ε=−(% change in demand)/(% change in price)

Question 27

Is marginal revenue positive or negative when demand is elastic?

Answer 27

When demand is elastic, marginal revenue is always positive

Question 28

How is a firm’s mark-up related to price elasticity of demand?

Answer 28

a firm’s mark-up is inversely proportional to the price elasticity of demand

Question 29

How are good-specific taxes and elasticity of demand linked?

Answer 29

the effect of good-specific taxes depends on the elasticity of demand on the products they are applied to

Question 30

What factors affect the elasticity of demand for a product?

Answer 30

demand is inelastic if there are few close substitutes

firms with market power have enough bargaining power to set prices without losing customers to competition

Question 31

When can competition policy be beneficial to consumers?

Answer 31

when firms collude to keep prices high

Question 32

When are monopoly rents earned?

Answer 32

When prices are able to be set above marginal costs without losing customers

Question 33

When does a natural monopoly arise?

Answer 33

when one firm can produce the same or similar goods at lower average costs than two or more firms

Question 34

How are natural monopolies controlled?

Answer 34

policy makers may enact price controls or make monopoly firms publicly owned

Question 35

How can firms increase their market power?

Answer 35

innovating

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