Pack 7 Flashcards
what is the short run/long run
short run - one factor of production cannot be varied
long run - all factors of production can be varied
what is diminishing marginal productivity (or returns)
as more variable factors are added to a fixed factor, marginal product will (eventually) fall
what is marginal cost
change in total cost (TC)/change in qty (Q)
explanation of relationship between marginal costs and marginal product
- inverse relationship : as MP rises MC will fall as MC = change in TC/change in output
- MC initially falls as the benefits of labour cause MP to rise
- then when diminishing marginal productivity sets in MC will rise, as MP is now falling
what are fixed costs and variable costs
fixed: do not vary with output and so have to be paid irrespective of output produced - e.g rent
variable: vary with output e.g cost of raw materials increases as output increases
how to work out average costs
average total cost (AC)
average variable cost (AVC)
average fixed cost (AFC)
AC = total cost/quantity
AVC = total variable cost/quantity
AFC = total fixed cost/qty
types of economies of scale
- Financial economies: better access to loans at low cost as firms grow in size
- Purchasing economies: gain discount from ordering in bulk for larger scale of production
- technical economies: spread cost of machinery over more units to help reduce LRAC, this machinery should help firms be more productive
- marketing economies:can spread cost of marketing over more units/more different products
- Managerial economies: manager’s salaries can also be spread over more units and by employing specialist managers in account, marketing etc should improve efficiency and further lower LRAC
- Economies of increasing dimensions: haulage firms for example can double the dimensions of what they transport but in consequence increase their volume; improving efficiency
- transporting in larger vehicles, more efficient ,with cost of fuel/driver wages spread over higher number of units
types of diseconomies of scale
- communication and co-ordination problems: harder as more employees/divisions and products to organise
- motivation issues: workers may feel isolated/suffer from lower morale as their input into the company is felt to be limited. May result in less productive workers, impacting LRAC
- bureaucracy: increasing number of forms to fill in/administrative tasks to complete
what is the minimum efficient scale?
- at some point the LRAC will reach its lowest level across the entire output range before rising again due to diseconomies of scale
- lowest level of output where : LRAC is minimised known as minimum efficient scale
- the higher the minimum efficient scale, the less competition is likely in market
- because likely the market is dominated by a few firms who are able to limit price below entrant’s average cost to deter entry due to economies of scale
what are external economies of scale and examples
- factors which cause the LRAC to fall as the size of the industry increases
- skilled labour attracted to the area: if firms locate in same area, should attract more highly skilled labour, reducing recruitment costs
- suppliers may locate nearby: reduce transportation costs for raw materials = lower LRAC
- better infrastructure e.g road links, railway: efficiency of transport improves
- shared innovations and administrations
how to work out
total revenue
average revenue
marginal revenue
TR = price x quantity
AR = total revenue / quantity
MR = change in total revenue/ change in qty
explanation of revenue curves in competitive markets
- in perfectly competitive market, all firms will set the same price over all levels of qty
- firms are price takes
- so last unit always sold at the same price which is = average revenue
- so AR and MR are both equal/constant: horizontal line
- TR go through origin and have constant gradient as firms will gain same amount of TR when they sell a produce at same price
explanation of revenue curves in non-competitive markets (monopoly)
- do have power to set own price - price makers, but still face downward sloping demand curve as firms cannot just sell at any price as consumers will be unwilling/unable to pay
- so to sell more, firms must cut their prices
- MR will fall 2x as fast as AR
- MR is gradient of total revenue, so TR curve will initially rise (at decreasing rate) when MR positive but falling
- TR will decrease (at increasing rate) as MR becomes increasingly negative
- when MR = 0, TR is maximised
how to work out
total profit
average profit
marginal profit
total profit = total revenue - total cost
average profit = total profit/quantity
marginal profit = change in total profit/ change in qty
what is
normal profit
supernormal profit
losses
normal profit = min profit necessary to keep firm in industry when AC=AR or TC=TR
supernormal profit = any profits earned above min amount necessary to keep firm in the industry : when AC<AR or TC<TR
losses: situation where profits earned are below the minimum amount necessary to keep a firm in the industry
when AC>AR or TC>TR
What is the economic profit?
opportunity cost is included in the firm’s total costs (reward/payment owners get)
what is the condition for profit maximisation?
- when business earns largest difference between TR and TC
- achieved where MC=MR
- if they expand any further than MC=MR, the next unit will make a loss, marginal profit will be negative
- if they reduce quantity produced below MC=MR, the firm will be missing out on profit from those unity - Marginal profit positive
