Micro Book 4 Flashcards
Costs, Revenues, Profits, Production Process, Marginal Returns, Returns to Scale, Economies and Diseconomics of Scale, Technological Change, Creative Destruction, Objectives of Firms, Business Growth, Barriers to Entry and Contestable Markets
What are rent and advertising examples of?
Fixed costs
What are raw materials and packaging examples of?
Variable costs
How do you work out the Fixed Cost per Unit
Total fixed cost / the number of units of output produced
How do you work out the Total Variable Cost
Variable Cost per Unit * Number of Units of Output produced
How to work out Marginal Cost
Change in total cost / Change in output
How to work out Average Cost
Average Fixed Cost + Average Variable Cost
What is the difference between accounting profit and economic profit
Economists also take into account the opportunity cost from not using an alternative method
How to work out Total Revenue
Quantity Sold * Average Selling Price
How to work out Average Revenue
Total Revenue / Quantity Sold
What is normal profit
The amount of profit that covers the opportunity cost of the factors of production being used in this way
Any profit above normal profit is called?
Economic/Abnormal/Supernormal profit
What is the purpose of economic activity
To produce goods and services
When is the long run
When all factors of production are variable in quantity
When is the short run
When at least one factor of production is fixed in quantity
Why might diminishing marginal returns take effect
A lack of at least one factor of production results in a deficiency of others, (even when hiring more labour, a lack of capital will result in production not increasing)
What is Marginal Physical Product
The increase in Total Physical Product for each additional worker
What is returns to scale, in the long run
The effect on output of an increase in the scale of the whole business
Economies of scale are?
Reductions in a firm’s long-run average costs due to an increase in the scale of the firms operations (internal) or the growth of the industry (external)
What are Technical Economies of Scale and they internal or external?
Larger firms are able to use better machinery and production methods to lower their average production costs (internal)
What are Financial Economies of Scale and they internal or external?
Larger firms are seen as less risky therefore lenders are willing to lend to them at lower rates of interest so reduces the cost of borrowing (internal)
What are Managerial Economies of Scale and they internal or external?
Larger firms are able to employ specialist staff whilst one manager would have to do all specialist tasks in a small business (internal)
What are Commericial Economies of Scale and they internal or external?
A more efficient approach to buying and selling as they buy in bulk so a firm can take advantage of bulk discounts and bargaining power (internal)
What are Risk-Bearing Economies of Scale and they internal or external?
Large firms are able to spread the cost of failure aross further than a smaller firm (internal)
Why can economics of scale be considered external?
It results in the growth of the industry without being caused by the company
What does the Short Run Average Cost curve show
It shows what happens when there is an increase in a variable factor of production
What causes the SRAC curve to shift
If a firm invests in all factors of production
What is the lowest point on the LRAC curve showing
The minimum efficient scale of production at which the firm is Productively Efficient
What is the difference between invention and innovation
Invention is the discovery of new ideas
Innovation is the exploration of new ideas to bring a new product to a market
What are a firm’s objectives assumed to be?
That firms will seek to maximise profit
where MR = MC
Where is profit maximised on a Cost/Revenue and Output graph
Where Marginal Revenue is equal to Marginal Cost
Where are sales maximised
Where Average Revenue equals Average Cost
Where is revenue maximised
When Marginal Revenue = 0
What does the “phenomenon” known as the divorce between ownership and control describe
When a firm isn’t ran by the people that owns it
What is the principal-agent problem and how could it be avoided
When the principal and agents incentives for a firm aren’t the same. It could be avoided by aligning the agents’ inentive with the prinipals’ by making their pay linked to profit or by giving them more shares
How could a business grow
Internally - produce more output without mergers or acquisition
Externally - produce more output by merging or taking over another business
What are the 4 different types of mergers/takeovers
Horizontal - two firms at the same stage of production
Forward Vertical - a firm acquires another at a later stage of production
Backward Vertical - a firm acquiring another at an earlier stage of production
Conglomerate - merging of two firms without a common interest
What is a forward vertical merge
A firm merges with another firm at a later stage of production
What is a horizontal merge
Two firms at the same stage of production
What is a backward vertical merge
A firm acquiring another firm at an earlier stage of production
What is a conglomerate merge
The merging of two firms without a common interest
What occurs on a graph when a firm invests all of its factors of production
The firm will move to a new short-run average cost curve that is bounded along a long run average cost curve
What is a concentration economies of scale
When firms within the same industry are clustered together, meaning that they can take advantage of existing infrastructure and supply networks
What is an information economies of scale
When larger businesses more readily have the capital to invest in newer and better technology, which can bring them cost advantages smaller businesses are otherwise unable to achieve.
What are possible barriers to entry/exit
Large set up costs
Sunk Costs
Economies of scale
Natural cost advantages
Legal barriers
Marketing barriers
