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Economics Y2 > Micro L1 & 3 > Flashcards

Micro L1 & 3 Flashcards

1
Q

Reasons why firms seek growth:

A

1) Higher profit
2) Lower unit costs
3) Greater market power
4) Diversification
5) Managerial objectives

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2
Q

How does a firm increasing in size lead to higher profit?

A

More production of goods and services leads to higher sales, revenue and profit

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3
Q

Market power:

A

Ability of a firm to raise prices and earn supernormal profit

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4
Q

Diversification:

A

Increasing range of products served by a business

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5
Q

What does the degree of diversification depend on?

A

How different the products are from the existing ones served by the business

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6
Q

How is diversification positive?

A

Reduces risk

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7
Q

How are managerial objectives a reason for growth?

A

Incentive to increase the size eg bonuses

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8
Q

Reasons why some firms remain small:

A
  • Worried about experiencing diseconomies of scale
  • Do not want the extra work and risks involved in expansion
  • Legal requirements differ by firm size
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9
Q

When do diseconomies of scale occur?

A

When a business grows so large that costs per unit increase

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10
Q

Reasons why some firms are forced to remain small:

A
  • Unable to finance expansion
  • Operate in niche market w/ small customer base
  • Skills and knowledge required may be lacking
  • Lack resources to cope w/ additional regulations
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11
Q

What are the different sectors of an economy?

A
  • Public
  • Private
  • Civil society
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12
Q

Private sector firm:

A

A firm that is not owned by gov

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13
Q

Who are private-sector firms owned by?

A
  • Shareholders
  • With a PLC
  • Family ownerd
  • Partner-owned (eg law firms)
  • Sole proprietors
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14
Q

PLC:

A
  • Public limited company
  • Trading on stock market, where anyone can buy shares
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15
Q

Family owned firm:

A

Shares are not traded on stock market

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16
Q

Sole proprietor:

A

Owned and run by one person

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17
Q

Why may the government own certain businesses?

A
  • Cannot survive without significant state funding
  • Want to determine the direction of the business
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18
Q

Civil society:

A

Not for profit sector eg charities

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19
Q

Principal:

A

Shareholder/Owner of a business

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20
Q

Agent:

A

Person in charge of day-to-day running of the business

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21
Q

What is the principal-agent problem?

A

The agent can make decisions on behalf of the business, which may be incorrect due to asymmetric info. This could lead to their dismissal

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22
Q

What are the two types of growth?

A
  • Organic
  • Inorganic
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23
Q

Organic growth:

A

Growth based on the firm’s own resources

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24
Q

Advantages of organic growth:

A
  • Lowest risk
  • Positive for worker morale
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25
Q

Disadvantages of organic growth:

A
  • Slow
  • Lack of new ideas and innovation
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26
Q

Inorganic growth:

A

Growth involving merging with other firms

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27
Q

Advantage of inorganic growth:

A
  • Instant access to increased economies of scale and market share
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28
Q

Disadvantages of inorganic growth:

A
  • Increasing market share attracts regulator’s attention
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29
Q

Equity:

A

Issuing shares

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30
Q

Types of mergers:

A
  • Horizontal merger
  • Vertical merger –> forward and backward integration
  • Conglomerate merger
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31
Q

Horizontal merger:

A

Merger between firms operating in SAME industry and SAME stage of production process eg two car assembly firms

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32
Q

What is the result of a horizontal merger known as?

A

Horizontal integration

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33
Q

Advantage of horizontal merger:

A

Affects degree of market concentration, as there are now fewer independent firms operating, which increases market power held by new firm

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34
Q

Backward integration:

A

Merging w/ firm involved in earlier stage of production process eg car company merging w/ component supplier

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35
Q

Forward integration:

A

Merging w/ firm involved in latter stage of production process eg car assembly plant merging w/ large distributor

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36
Q

Advantage of vertical integration:

A
  • Greater control over supply chain
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37
Q

Conglomerate merger:

A

Merging of two firms operating in very different markets

38
Q

Advantage of conglomerate merger:

A

Diversified portfolio of production leaves firm less vulnerable to recession

39
Q

Disadvantage of conglomerate merger:

A

May be managerial diseconomies if management team doesn’t understand all aspects of new business

40
Q

Disadvantages of mergers (general):

A
  • Cost of integrating management may have been underestimated
  • Production systems may not be compatible
  • Corporate cultures may collide
41
Q

Why may a firm decide to demerge?

A
  • Experiencing diseconomies of scale –> higher long-run avg costs
  • Reduce its monopoly power (for govs)
42
Q

Possible advantages of demerger:

A
  • More promotions available
  • Lower prices and more choice for consumers
43
Q

Possible disadvantages of demergers:

A
  • If firms are more efficient, possible job losses
  • Short-term issues for consumers
44
Q

What is the short-run defined as?

A

The period when there is at least one fixed factor of production

45
Q

What is the long run defined as?

A

The period over which all factors of production are variable

46
Q

Give an example each for a variable and fixed factor:

A

Fixed: Capital, land
Variable: Labour

47
Q

Hence, what is the only way to increase output in the short-run?

A

Increase labour

48
Q

Law of diminishing returns:

A

If a firm increases input of variable factor whilst holding another factor constant, it will derive less additional output per unit of labour for each further increase

49
Q

What assumption does the Law of Diminishing Returns make?

A

Capital is fixed

50
Q

Why does the Law of Dimishing Returns state that output initially increases before falling?

A

Labour productivity increases due to:
- Specialisation is occurring
- Underutilisation of fixed factors eg capital

51
Q

Why does the Law of Diminishing Returns state that output falls after an initial increase?

A

Labour productivity falls due to:
- Fixed factors of production constrains production

52
Q

When marginal product is zero, what happens to total product?

A

TP is maximised

53
Q

2 types of costs:

A

1) Explicit costs –> require payment
2) Implicit costs (opportunity cost)

54
Q

What are the 2 types of explicit costs?

A

1) Fixed
2) Variable

55
Q

Fixed costs:

A

Costs that do not vary w/ output

56
Q

Examples of fixed costs:

A
  • Rents
  • Salaries
  • Interest on loans
  • Advertising
  • Business rates
57
Q

What is the difference between wages and salaries?

A
  • Wages are paid hourly
  • Salaries paid in fixed increments throughout year
58
Q

Variable costs:

A

Costs that vary w/ output

59
Q

Example of variable costs:

A
  • Wages
  • Utility bills
  • Raw material costs
  • Transport costs
60
Q

Sunk costs (w/ example):

A

Costs that the firm cannot avoid paying even if it chooses to produce no output eg leasing machinery

61
Q

Equation for total costs:

A

Total costs = total variable costs + total fixed costs

62
Q

What does the total fixed cost curve look like?

A

Horizontal

63
Q

What common assumption is made about total costs in the short-run?

A

At very low levels of output, total costs will rise at a lower rate than output, however total costs will accelerate as diminishing returns set in

64
Q

Equation for avg fixed cost:

A

Avg fixed cost = Fixed costs/Output

65
Q

Why does AFC fall as output increases?

A

Fixed cost is being spread across greater output

66
Q

Avg variable cost equation:

A

Avg variable cost = Variable costs/Output

67
Q

What does the average variable cost look like and why?

A
  • Positive quadratic
  • Due to Law of Diminishing Returns
68
Q

Avg total cost equation: (2)

A

1) AFC + AVC
2) Total cost/Quantity produced

69
Q

Marginal cost:

A

Change in total cost when one additional unit of output is produced

70
Q

Equation for marginal cost:

A
  • Gradient of total cost curve
  • Change in TC/ Change in Quantity
71
Q

What points does marginal cost curve always go through?

A

Minimum point of AVC and AC curve

72
Q

Why does the gap between AC and AVC get smaller as output increases?

A
  • AFC (the gap) falls as output rises
  • AVC rises because of law of diminishing returns
73
Q

Revenue:

A

Payments firms receive when they sell the goods and services they produce over a given time period

74
Q

Total revenue equation:

A

TR = P x Q

75
Q

Marginal revenue:

A

Additional revenue arising from the sale of an additional unit of output

76
Q

Marginal revenue equation:

A

Change in total revenue/Change in quantity

77
Q

Average revenue:

A

Revenue per unit of output sold

78
Q

Average revenue equation:

A

Total revenue/Quantity

79
Q

What is AR always equal to?

A
  • Price
  • Demand
80
Q

What is the relationship between MR and AR?

A

MR is twice as steep as AR

81
Q

Why does the analysis of revenues vary for different firms?

A

Dependent on whether or not the firm has any control over prices

82
Q

What factor determines whether the firm has control over prices?

A

The amount of competition:
- firms under high (perfect) competition cannot influence prices
- firms under less competition can influence prices

83
Q

Conditions of high (perfect) competition:

A

1) Many buyers and sellers
2) They are price-takers
3) Homogenous goods
4) No barriers to enter/exit market
5) Perfect information
6) They are profit maximisers (MC = MR)

84
Q

Conditions of revenue where firm has some control over price (imperfect):

A

1) Few buyers and sellers
2) They are price-makers
3) Differentiated goods
4) High barriers to enter/exit market
5) Imperfect information

85
Q

Conditions of revenue where firm has no control over price:

A
  • P = MR = AR (horizontal curve)
  • TR is fixed linear curve
86
Q

Conditions of revenue where firm has some control over price:

A
  • TR –> Quadratic curve
  • Linear MR
  • P = AR = D
87
Q

What is the average revenue curve equivalent to?

A

D curve

88
Q

When demand is price elastic, what happens to total revenue when price increases and decreases?

A

Opposite always happens:
- Price increase causes decrease in total revenue
- Price decrease causes increase in total revenue

89
Q

When demand is price inelastic, what happens to total revenue when price increases and decreases?

A

Same thing happens:
- Price increase causes increase in total revenue
- Price decrease causes decrease in total revenue

90
Q

What half of a graph is elastic and inelastic?

A
  • Top half = Elastic
  • Bottom half = Inelastic

Economics Y2 (8 decks)

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