Micro A2.3 Business Behaviour and the Labour Market Flashcards
what is the difference between TR and MR
TR = the total amount of money coming into a business
MR= the extra revenue a firm gains from selling one more unit of production
What is the Economic cost of production?
For a firm this is the opportunity cost of production: the money that could have been made if the resources where employed in their next best use
What is the Short Run
the short run is the length of time when one factor of production is fixed and cannot be changed
Define The Law of Diminishing Marginal Returns
this occurs in the SR when there is a fixed and variable factor running up against each other. There will come a point where each extra unit of the variable factor will produce less extra output than the previous one
Why does MC intercept at the lowest point on the AC curve
When MC is below AC the cost of producing the unit will be lower than the average cost so will pull the average down but when MC is above AC the costs will be higher than the average pulling AC up. there will come a point where MC = AC and this is where they intercept at the lowest point
Define Economies of Scale + Diseconomies of Scale
EOS are the advantages of large scale production which enable large firms to have have lower average costs than smaller firms
DOS are the disadvantages that arise in large firms that reduce efficiency and raise average costs
What is the minimum efficient scale
the minimum level of output needed for firms to fully exploit EOS and where constant returns to scale are just met
What are Internal + External Economies of scale
Internal = advantages that a firm gains due to it’s own growth independent of the industry or other firms
External = advantages that a firm gains due to the industry it operates in growing ( causes LRAC to shift downwards)
what are the technical economies that lead to internal economies of scale
- Specialization
- Balanced team of machines - bought specialized machines for each stage of the production line
- Indivisibility of Capital - some processes require large amounts of machinery to make it possible to produce them on a large scale
What ae Financial/ Risk Bearing and Managerial Economies
Financial - large firms have more assets so are more secure + can obtain finance easier and experience lower interest rates
Risk Bearing - large firms operate in lots of markets so if one collapses they will not collapse
Managerial - large firms can appoint specialist managers in every field and can do job better
What are Marketing & Purchasing Economies
Buying in Bulk - large firms can buy in bulk at cheaper prices
Distribution - large firms get cheaper rates from delivery businesses because they bring them a lot of business
How does Labour lead to EOS with regards to External Economies of Scale
- Businesses located close to each other will find that labour comes to them (silicon valley) reducing cost of recruiting
- Local education courses will train people to work in the industry
- Firms can hire trained staff from other businesses = more efficient because they don’t have to train them
DOS in regards to External Economies of Scale
Workers - such a big business they have little hop of promotion so start to slack
Geo - firms may find it hard to control parts of their business which is far away
Change - hard for rim to respond to changes in the market
Co-ordination - as firm grows progressively more difficult to control and manage the different parts of the business = poorer quality work
Communication - time lags in communication and lose accuracy (Like Chinese whispers)
What is Normal Profit
is the return sufficient enough to keep factors of production in the market and cover opportunity costs where AC=AR or TC=TR
Where does Supernormal Profit occur
Where AR>AC and TR>TC
