MICRO Theory of the Firm

Question 1

Limit Pricing

Answer 1

Where a firm prices it’s products below the profit maximising price, instead near their average total costs in order to discourage new entrants into the market.

Question 2

Predatory Pricing

Answer 2

When a firm deliberately drives out competitors by setting artificially low prices. (illegal)

Question 3

Short Run

Answer 3

The time period in which at least one factor of production is fixed.

Question 4

Long Run

Answer 4

The time period in which no factors of production are fixed.

Question 5

Very Long Run

Answer 5

The time period in which all of the firm’s factors of production are variable, and additionally factors outside of the firm can vary such as government policies and technology.

Question 6

Allocative Efficiency

Answer 6

State of the economy where there is an optimum allocation of resources meaning the producer and consumer surplus is maximised.

Question 7

Productive Efficiency

Answer 7

When a firm operates at the lowest point on its average costs curve.

Question 8

Productive efficiency implies the firm is…

Answer 8

… using the least costly production inputs … using the best available technologies and the most efficient production process … exploiting economies of scale … minimising waste of resources in their production process

Question 9

Dynamic Efficiency

Answer 9

Occurs over a period of time, when a firm invest retained profits (i.e. RandD or human capital) into improving the quality of products and the production process, as well as increasing consumer choice.

Question 10

X-inefficiency

Answer 10

When a firm’s average costs are higher than necessary at a given output; uses more inputs than needed.

Question 11

Social Efficiency

Answer 11

When the market takes externalities into account meaning social welfare is maximised; MSB=MSC.

Question 12

Minimum Efficient Scale

Answer 12

Corresponds to the lowest point on the long run average cost curve.

Question 13

Profit Satisficing

Answer 13

When a business sacrifices profits in order to satisfy as many key stakeholders as possible.

Question 14

Stakeholders - Definition - e.g.

Answer 14

• An individual, group or organisation who has an interest in how a business is performing. - Shareholders, managers, workers/TUs, government, consumers and environmental agencies.

Question 15

CSR

• Stands for…
• Definition
• Reasons

Answer 15

Corporate Social Responsibility

Occurs when a firm takes into account social and environmental concerns on a voluntary basis.

• Attract consumers and improve brand image
• Recruitment benefits: attract, motivate and retain workers
• Address potential legal and regulatory action

Question 16

Motives for non-profit maximising outputs

Answer 16

• market share and brand loyalty
• lower prices = limit and predatory pricing
• economies of scale
• Principle-Agent Problem