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Economics > Micro Book 4 > Flashcards

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

1
Q

What are rent and advertising examples of?

A

Fixed costs

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2
Q

What are raw materials and packaging examples of?

A

Variable costs

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3
Q

How do you work out the Fixed Cost per Unit

A

Total fixed cost / the number of units of output produced

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4
Q

How do you work out the Total Variable Cost

A

Variable Cost per Unit * Number of Units of Output produced

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5
Q

How to work out Marginal Cost

A

Change in total cost / Change in output

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6
Q

How to work out Average Cost

A

Average Fixed Cost + Average Variable Cost

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7
Q

What is the difference between accounting profit and economic profit

A

Economists also take into account the opportunity cost from not using an alternative method

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8
Q

How to work out Total Revenue

A

Quantity Sold * Average Selling Price

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9
Q

How to work out Average Revenue

A

Total Revenue / Quantity Sold

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10
Q

What is normal profit

A

The amount of profit that covers the opportunity cost of the factors of production being used in this way

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11
Q

Any profit above normal profit is called?

A

Economic/Abnormal/Supernormal profit

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12
Q

What is the purpose of economic activity

A

To produce goods and services

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13
Q

When is the long run

A

When all factors of production are variable in quantity

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14
Q

When is the short run

A

When at least one factor of production is fixed in quantity

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15
Q

Why might diminishing marginal returns take effect

A

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)

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16
Q

What is Marginal Physical Product

A

The increase in Total Physical Product for each additional worker

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17
Q

What is returns to scale, in the long run

A

The effect on output of an increase in the scale of the whole business

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18
Q

Economies of scale are?

A

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)

19
Q

What are Technical Economies of Scale and they internal or external?

A

Larger firms are able to use better machinery and production methods to lower their average production costs (internal)

20
Q

What are Financial Economies of Scale and they internal or external?

A

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)

21
Q

What are Managerial Economies of Scale and they internal or external?

A

Larger firms are able to employ specialist staff whilst one manager would have to do all specialist tasks in a small business (internal)

22
Q

What are Commericial Economies of Scale and they internal or external?

A

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)

23
Q

What are Risk-Bearing Economies of Scale and they internal or external?

A

Large firms are able to spread the cost of failure aross further than a smaller firm (internal)

24
Q

Why can economics of scale be considered external?

A

It results in the growth of the industry without being caused by the company

25
Q

What does the Short Run Average Cost curve show

A

It shows what happens when there is an increase in a variable factor of production

26
Q

What causes the SRAC curve to shift

A

If a firm invests in all factors of production

27
Q

What is the lowest point on the LRAC curve showing

A

The minimum efficient scale of production at which the firm is Productively Efficient

28
Q

What is the difference between invention and innovation

A

Invention is the discovery of new ideas
Innovation is the exploration of new ideas to bring a new product to a market

29
Q

What are a firm’s objectives assumed to be?

A

That firms will seek to maximise profit
where MR = MC

30
Q

Where is profit maximised on a Cost/Revenue and Output graph

A

Where Marginal Revenue is equal to Marginal Cost

31
Q

Where are sales maximised

A

Where Average Revenue equals Average Cost

32
Q

Where is revenue maximised

A

When Marginal Revenue = 0

33
Q

What does the “phenomenon” known as the divorce between ownership and control describe

A

When a firm isn’t ran by the people that owns it

34
Q

What is the principal-agent problem and how could it be avoided

A

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

35
Q

How could a business grow

A

Internally - produce more output without mergers or acquisition
Externally - produce more output by merging or taking over another business

36
Q

What are the 4 different types of mergers/takeovers

A

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

37
Q

What is a forward vertical merge

A

A firm merges with another firm at a later stage of production

38
Q

What is a horizontal merge

A

Two firms at the same stage of production

39
Q

What is a backward vertical merge

A

A firm acquiring another firm at an earlier stage of production

40
Q

What is a conglomerate merge

A

The merging of two firms without a common interest

41
Q

What occurs on a graph when a firm invests all of its factors of production

A

The firm will move to a new short-run average cost curve that is bounded along a long run average cost curve

42
Q

What is a concentration economies of scale

A

When firms within the same industry are clustered together, meaning that they can take advantage of existing infrastructure and supply networks

43
Q

What is an information economies of scale

A

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.

44
Q

What are possible barriers to entry/exit

A

Large set up costs
Sunk Costs
Economies of scale
Natural cost advantages
Legal barriers
Marketing barriers

Economics (12 decks)

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