Revenue & Costs Of A Firm Flashcards
What costs does a firm have?
Fixed Costs, Variable Costs and Opportunity Cost
Cost Equations
AC =TC/Q
AFC = TFC/Q
AVC = TVC/Q
MC = TCn - TCn-1
Why does MC initially decrease but then increase?
- Specialisation allows for higher output per labour cost
- Eventually, other fixed factors limit output (usually capital) e.g (employing 7th sewist in a factory with 5 machines)
Economies Of Scale
The cost advantages of production on a large scale
Types of Internal Economies Of Scale
Technical Economies Of Scale (Law Of Increased Dimensions and Specialisation)
Purchasing Economies Of Scale (Negotiate Discounts with Suppliers for Larger Quantities)
Managerial Economies Of Scale (Specialist Managers with expertise and better decision making)
Financial Economies Of Scale (Borrow money at a lower rate of interest as they are less risky to banks)
Risk-Bearing Economies Of Scale (Can diversify into different product areas)
Marketing Economies Of Scale (Brand awareness creates less need to advertise)
External Economies Of Scale
Relevant qualifications being offered (reducing training costs)
Suppliers locating in the same area, reducing transport costs
Internal Diseconomies Of Scale
Increased wastage and loss in large warehouses
Difficult communication can impact staff morale
Increased co-ordination difficulty (opp cost)
External Diseconomies of Scale
As a whole industry grows, raw materials become more expensive
Returns To Scale
Increasing Returns: Increase in all factor inputs = Larger Increase in outputs
Constant Returns: Increase in all factor inputs = Equal Increase in outputs
Decreasing Returns: Increase in all factor inputs = Smaller Increase in outputs
Revenue Of Firms
TR = Q x P
MR = TR - TRn-1
TR is maximised when PED = -1
Price Maker Demand Curve
Price makers have some power over price
It is downwards as to increase sales, the price must fall
Demand Curve for Price Takers
Is horizontal (perfectly elastic) as costs = price and there are other competitors
Normal Profit Vs Super Normal Profit
Normal Profit: Revenue = Money Costs + Opportunity Costs
- Minimum Level of Profit needed to keep resources in their current use in the long run
Supernormal Profit: Revenue > Money Costs + Opportunity Costs
- Creates Incentive for other firms to enter the industry
Profit Max is when MR = MC
Allocative Efficiency
Price = Marginal Cost
(No one can be made better off, without making someone worse off)
Productive Efficiency
Firms produce at lowest point on AC
Production at lowest possible cost per unit
Dynamic Efficiency
The ability of a firm to reduce their average costs in the long run (such as new technology)
X - Inefficiency
Firms are unable to fully utilise their resources (Inside PPF)
