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Microeconomics > Firms, Costs & Revenue > Flashcards

Firms, Costs & Revenue Flashcards

1
Q

What do firms do?

A

They bring together factors of production and organise the production process to produce output.

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2
Q

Why are large firms seen as successful? (4 reasons)

A

Profit, Economies of Scale, Greater market share, More assets to overcome challenges.

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3
Q

What is internal (organic) growth?

A

When a firm increases output through investment, diversification or ads to increase demand.

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4
Q

What is external (inorganic) growth.

A

When a firm merges with or takes over another firm.

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5
Q

What are takeovers?

A

When a firm buys more than half of another firm’s shares, taking control of all decisions & management.

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6
Q

What is a merger?

A

When two firms combine and have mutual control.

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7
Q

What is horizontal integration?

A

Two firms of the same industry and stage of production join together.

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8
Q

What is backward & forward vertical integration?

A

Forward - a firm merges with another firm in the same industry but at a later stage of production.

Backward - earlier stage of production

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9
Q

What is a conglomerate?

A

Merger of two firms in different markets.

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10
Q

How can firms grow internally? (3 points)

A

Investing in FoPs, Diversification, Marketing to increase demand.

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11
Q

What are the benefits of internal growth? (3 points)

A

No culture clash, steady growth (no debts), build on the firm’s strengths.

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12
Q

What are the drawbacks of internal growth? (3 points)

A

Slow growth (angry shareholders), growth of firm depends on the state of the market, hard to grow behind market leader.

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13
Q

What are the benefits of external growth? (5 points)

A

Faster growth, Economies of scale, share R+D, Less competition (power), More assets.

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14
Q

What are the drawbacks of external growth? (4 points)

A

Culture clash (diseconomies of scale), CMA, unstable growth (compromises quality), bad morale (redundancies)

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15
Q

What is the Principle Agent Problem?

A

When one agent makes decisions on behalf of others. This can lead to communication problems and less effective production.

Eg. Stakeholders may become prominent -> more ST profit goals instead of LT investment.

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16
Q

Why do some firms remain small? (4 reasons)

A

Lack of access to credit, unattractive to shareholders, lack of assets/finance, niche market.

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17
Q

How can firms raise finance? (4 points)

A

Loans, Profits, Assets, Shares.

18
Q

What is a demerger?

A

When a firm splits into 2 or more separate firms.

19
Q

Why may a firm demerge? (4 reasons)

A

Change in strategies, to raise finance, CMA, Diseconomies of scale.

20
Q

What is total, average and marginal revenue?

A

Total Revenue (TR) - total £ received from output.

Average Revenue (AR) - revenue per unit sold

Marginal Revenue (MR) - revenue for selling an additional unit.

21
Q

What is the difference between revenue and profit?

A

Revenue - income from sales

Profit - revenue left after costs are deducted

22
Q

What is the relationship between MR and TR?

A

When MR become negative, TR falls.

23
Q

What are the 5 marginal rules?

A

When AR rises, MR is above it.
When AR falls, MR is below it.

If AR falls then rises, MR intersects at minimum.
If AR rises then falls, MR intersects at maximum.

If AR is constant, MR is also constant.

24
Q

How does PED change along the demand curve?

A

Elastic at low outputs, Inelastic at high outputs.

25
Q

How does PED affect Revenue?

A

At low o/p, MR is +ve and you gain £ from increasing o/p. (Elastic PED)

At maximum revenue, PED = 1, then you start to lose £ by increasing o/p. (Inelastic PED)

26
Q

What is a Price Maker?

A

A firm which can influence market price when it changes its quantity. (needs significant market share) (AR curve is like a D curve)

27
Q

What is a Price Taker?

A

A firm w/o control over market price, so has to accept the market price if it wants to sell goods. (AR curve would be flat at market price)

28
Q

What is the difference between fixed and variable costs?

A

Fixed - Costs that don’t change with output. eg. rent, salaried workers.

Variable - Costs that vary with output. eg. raw materials.

29
Q

What are imputed costs?

A

Resources with an opportunity cost but for which no payment is made.

30
Q

What is the marginal cost?

A

Cost of producing an additional unit. (Change in TC / MP)

31
Q

What is the difference between short run and long run?

A

Short run - at least 1 FoP is fixed in supply.

Long run - all FoPs are variable.

32
Q

What is the difference between marginal product and average product?

A

Marginal - New output as a result of adding a new worker.

Average - The total output / no. of workers

33
Q

What are Diminishing Marginal Returns?

A

In the short run, marginal product declines as additional units of FoP are added, therefore there is a limiting FoP.

The cost of new FoPs aren’t spread over as many new units of o/p.

(Marginal costs increase and productivity falls)

34
Q

What is the relationship between marginal profit and marginal cost?

A

Diminishing marginal returns set in at max MP. Then MC increases as MP falls. [SHORT RUN}

35
Q

What is the problem with the theory of diminishing marginal returns?

A

Globalisation leads to fewer constraints on inputs. FoPs are less fixed.

36
Q

What are the differences between internal and external economies of scale?

A

Internal - the firm grows in size

External - the industry that the firm is in grows in size

37
Q

Describe the 4 reasons for internal economies of scale.

A

Purchasing - more bargaining power, buying in bulk

Managerial - specialisation, efficiency

Financial - bigger firm, better loans, more assets

Technical - able to invest in more efficient capital

38
Q

Describe the 2 reasons for external economies of scale.

A

Education - if more institutions offer training, firms don’t have to (lower costs)

Infrastructure - better transport links, roads -> lower costs

39
Q

Describe 3 reasons for diseconomies of scale.

A

Communication - many chains of command, original message from management may get distorted

Co-ordination - conflict between different departments, organisation problems

Shortage of FoPs - as industry grows, firms compete for FoPs, wages & materials cost more

40
Q

What is the minimum efficient scale?

A

The point where firms can produce at a competitive cost (LRAC curve is low & flat)

Microeconomics (6 decks)

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