Profits, Objectives & Barriers to Entry Flashcards
What is Supernormal profit?
Profit earned where average revenue is greater than average cost (AR > AC).
What is Normal profit?
Profit required to keep a firm in a market in the long run. (AR = AC)
What is Marginal profit?
Profit recieved from producing an additional unit (how much MR > MC).
What quantity do firms produce at if they aim to:
Profit max, Revenue max, Sales max
Profit - MR = MC
Revenue - MR = 0 (min AC)
Sales - AC = AR
In what order do you draw a cost/ revenue diagram?
AR (is it a taker or maker), MR, MC, Q (goes up to AR curve), AC (minimum where MR = 0)
When would a firm shut down in the short run?
If the firm is making a loss but they are covering their variable costs, then it will continue to operate in the hope it can cover fixed costs in the long run.
If they cannot cover the variable costs, they will shut down. (AR < AVC)
When would a firm shut down in the long run?
As there are no fixed costs in the long run, firms will shut down if they don’t earn at least normal profit.
What are the 4 firm objectives?
Profit satisficing
Revenue maximisation
Sales/ growth maximisation
Utility maximisation
What do Neo-Classical economists think about firm objectives?
They believe in a free market, maximising profit in the short run and only leaving the market if they are making a loss in the long run.
What do Neo-Keynesian economists think about firm objectives?
They believe in maximising profit in the long run. It’s best not to change short run prices and output as it creates uncertainty in consumers.
(is the firm struggling, are the goods of high quality)
Explain legal barriers as a barrier to entry.
The law may give firms certain privileges such as exclusive rights/ broadcast licenses or they may turn nationalised industries into monopolies.
This stops private firms from trying to set up in the industry/
Explain limit pricing as a barrier to entry.
Firms may lower their prices to maximise SR profit or preventing new firms entering to protect their LR sales.
As otherwise, the new firms will take their future sales.
Explain sunk costs as a barrier to entry.
Sunk costs are costs on things which aren’t recoverable. E.g. capital can be sold but you can’t retrieve money spent on advertising.
Firms with little to lose may be encouraged to enter.
Explain capital costs as a barrier to entry.
The initial cost to enter the market can be very high compared to others. E.g. cheaper to set up a corner shop than a car plant.
Explain scale economies as a barrier to entry.
New firms won’t be able to produce at the bottom of their AC curve yet, therefore they can’t benefit from economies of scale. They will have higher average costs than established firms.
