Firms and Decisions Flashcards
Explicit and implicit costs
Explicit: actual monetary payment is made
Implicit: does not involve a direct payment in money-usually involves an opportunity cost
Total fixed cost, total variable costs and total cost
TFC: does not vary with output (cost of building the factory etc)
TVC: vary positively with output
Internal economies of scale
Fall in unit Cost when the firm increases output by expanding its scale of production
internal EOS types
Technical economies
Specialization and division
Less training is required and workers can be more productive time wise, lowering unit costs
Indivisibilities:
Large companies spread the capital outlay of large machines over an increased output, lowering unit costs
Research and development
Develop better and cheaper ways of production, hence lowering the unit costs
Non technical economies
Bulk purchase
Bulk buying of raw materials enables large firms to obtain the goods at lower costs and better terms , lowering unit costs
Advertising
Advertising costs per unit will be proportionately less for large companies such as NTUC, as compared to a smaller provision shop
Financial economies:
Banks and financial institutions are more likely to borrow money to large firms and as such they enjoy lower interest rates
internal DiseconS types
Problems in communications and coordination
Leads to inefficiency and hence a high cost of production
Low morale
A large firm will have difficulty treating everyone equally and hence, the one at the end of the hierarchy may feel demoralized , hence leading to lower productivity and higher unit costs
Shut down condition
When the variable costs can be paid but not the fixed costs, the firm can continue to continue production, ie TR can cover TVC
Perfect competition
Many firms and many consumers
Complete freedom of entry and exit, and they only earn NORMAL PROFITS in the long run
Homogenous products, the products they sell is identitical
Both seller and buyers have perfect knowledge on the market
example: shares in SGX
*EFFICIENCY TYPES: allocative
Allocation of resources to produce the combination of goods and services most wanted by society
*EFFICIENCY TYPES: productive
production of goods and services at the lowest possible average costs of production
*EFFICIENCY TYPES: dynamic
Firms are technologically progressive in order to reduce the average cost of production, or to meet the changing demands of consumers over time
Monopoly characteristics
Single seller—> price setter
Unique product: no close substitutes for the monopoly products. Hence their products are price inelastic.
Imperfect knowledge of product
High barriers to entry and exit
maintains SUPERNORMAL profits in the long run.
Barriers to entry
Substantial internal economies of scale
Control of essential raw materials: monopolists have control over the key inputs
Legal barriers
Patent, copyrights, license
Brand loyalty
A strong brand name causes a new brand to have difficulty breaking into the market as it is compete against a well established brand
How new firms can overcome these Barriers to entry
Aggressive advertising
How monopolists maintain its position
Pricing strategies:
+unique product, hence even when they raise prices, output falls less than proportionately
+predatory pricing: selling below the marginal price to drive out competitors
+price discrimination: charging different prices for different consumers for the same product
Non pricing strategies
+brand loyalty
-increases demand and reduces PED through aggressive advertising and product differentiation
+product development
Monopolistic Competition
low/no high barriers to entry, only earns normal profits in the long run
many small firms
goods are slightly differentiated, hence they are close substitutes with each other. (they do not have the supernormal profits like Oligopolies and Monopolies do do product differentiation)
example: blog shops
