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Economics > Section 3: Business Economics > Flashcards

Section 3: Business Economics Flashcards

1
Q

What is production

A

Manufacturing something in order to sell it

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2
Q

What are the two types of inputs

A

Tangible
Intangible

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3
Q

What is productivity

A

The output per unit of input employed

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4
Q

What is labour productivity

A

The output per worker or output per hour worked

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5
Q

How do you calculate the labour productivity

A

Take amount of output produced in a particular time
Divide this by the total number of workers or the total hours worked by all the workers

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6
Q

Which factors improve labour productivity

A

Better training
More experienced
Improved technology
Specialisation

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7
Q

What is the division of labour

A

A type of specialisation where production is split into different tasks and specific people are allocated to each task

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8
Q

Name the main economist who endorses the division of labour

A

Adam Smith

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9
Q

What are the advantages of specialisation

A

People can specialise in the thing they are best at
Leads to better quality and higher quantity of products for the same amount of effort
Specialisation can lead to economies of scale for firms
Tackles problem of scarcity by increasing efficiency
Training costs are reduced

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10
Q

What are the disadvantages of specialisation

A

Repetitive tasks can lead to boredom
Countries become less self-sufficient if they only specialise in one field
Lack of flexibility e.g. if a company left an area the workforce would struggle to adapt

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11
Q

What are the four functions of money

A

A medium of exchange
A measure of value
A store of value - money can be saved
A standard of deferred payment - money can be paid at a later date for something that is being consumed now

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12
Q

What is a firm

A

Any sort of of business organisation

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13
Q

What is an industry

A

All the firms providing similar goods and services

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14
Q

What does the economic cost include

A

The cost of the factors of production and the opportunity cost of the factors that aren’t paid for

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15
Q

Explain the opportunity cost of a factor of production

A

The money that you could’ve gotten by putting it to its next best use

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16
Q

What is the short run

A

The period of time when at least one of a firm’s factors of production is fixed

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17
Q

What is the long run

A

The period of time all of a firm’s factors of production is varied

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18
Q

What are fixed costs

A

Don’t vary with output in the short run

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19
Q

What are variable costs

A

Costs vary with output

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20
Q

In the long run what type of costs are there

A

In the long run all costs are variable

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21
Q

What is total cost

A

All the costs involved in producing a particular level of output

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22
Q

How do you work out the total cost for a particular output level

A

Total Fixed Costs + Total Variable Costs

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23
Q

What is the average cost

A

Cost per unit produced

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24
Q

How do you work out the average fixed cost

A

Total Fixed Cost / Quantity

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25
Q

How do you work out the average variable cost

A

Total Variable Cost / Quantity

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26
Q

What is marginal cost

A

The extra cost incurred as a result of producing the final unit of output

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27
Q

Which type of cost exclusively affects marginal cost

A

Variable cost

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28
Q

How do you work out the marginal cost

A

Total Cost (at the current output level) - Total Cost (at one unit less)

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29
Q

What is general formula for marginal cost

A

Change in TC / Change in Quantity

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30
Q

Describe the shape of the marginal cost curve on a graph of cost against output

A

Decreases initially when output increases then begins to increase in the short run
This is because of the law of diminishing returns

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31
Q

In relation to the marginal cost curve when does average cost reach its minimum

A

When the AC curve meets the MC curve

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32
Q

Explain the relationship between the marginal cost curve and the average cost curve

A

When MC is lower than AC the AC will be falling - this is because if the cost of adding one more unit is decreasing this means the cost per unit must be decreasing
As MC rises and gets to a point where it is higher than AC then the AC must also rise

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33
Q

Where on a graph of Cost against output is there a minimum in productive efficiency

A

When marginal cost is equal to average cost

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34
Q

In relation to the marginal cost curve when does average variable cost reach its minimum

A

When the AVC curve meets the MC curve

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35
Q

Describe and explain the average fixed cost curve on a graph of cost against output

A

Falls as output rises because the total fixed cost is spread across the greater output

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36
Q

When does the law of diminishing returns apply

A

In the short run because at least one factor stays fixed

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37
Q

What is the marginal product

A

The additional output produced by adding one more unit of a factor input

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38
Q

Describe and explain the marginal product curve

A

It begins to increase but then decreases at the point of diminishing returns
This is because adding more units of a factor will begin to limit additional output you get if the other factors are fixed

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39
Q

What is the law of diminishing returns

A

If one variable factor of production is increased while other factors stay fixed, eventually the marginal returns from the variably factor will begin to decrease

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40
Q

What is the relationship between the marginal cost curve and the marginal product curve and explain why

A

Mirror images of each other
This is because , ceteris paribus, if you’re getting less additional output from each unit of input then the cost per unit of that output will be greater

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41
Q

What is the law of variable proportions

A

The law of diminishing returns

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42
Q

What is economies of scale

A

Cost reductions that occur when companies increase production

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43
Q

What are the two categories that economies of scale fall in

A

Internal - involve changes within a firm
External - involve changes outside a firm

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44
Q

What are the six types of internal economies of scale

A

Technical Economies of Scale
Purchasing Economies of Scale
Managerial Economies of Scale
Financial Economies of Scale
Risk-bearing Economies of Scale
Marketing Economies of Scale

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45
Q

Explain Technical Economies of Scale

A

Production line methods used by large firms can be used to make a lot of things at a low average cost
Specialised equipment bought by large firms can reduce average cost
Workers can specialise which might not be possible in a small firm
Law of dimensions can cause economies of scale

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46
Q

Explain Purchasing Economies of Scale

A

Larger firms making lots of goods will need larger quantities of raw materials and therefore can negotiate discounts with supplier
Large firms will be the biggest customers to suppliers they can drive a hard bargain

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47
Q

Explain Managerial Economies of Scale

A

Larger firms can employ specialist manager which will lead to better decision making which will lead to reduced cost

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48
Q

Explain Financial Economies of Scale

A

Large firms can borrow money at a lower rate of interest - banks see it as less risky

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49
Q

Explain Risk-bearing Economies of Scale

A

Larger firms can diversify
Diversification leads to a more predictable overall demand

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50
Q

Explain Marketing Economies of Scale

A

Advertising is a fixed cost with more units spread over time for larger firms which means cost per unit is lower
The cost per product of advertising several products may also be lower than the cost of advertising one
Larger firms benefit from brand awareness so advertising will not be as necessary

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51
Q

Explain external economies of scale

A

Local colleges may offer qualifications needed to work in big companies - reducing training cost
Large companies locating to an area may improve the road networks and local transportation
If lots of firms locate to the same area they may be able to share resources

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52
Q

How can extremely successful firms gain monopoly power

A

If a firms average cost’s decrease in can reduce prices of product, undercutting the competition
This can lead to a firm getting a bigger and bigger market share
Firms can eventually put its competition out of business and become the only supplier

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53
Q

Explain the internal diseconomies of scale

A

Wastage and loss can increase as materials seem to be in excess
Communication may become difficult when firm grows
Managers may lose control over what’s going on
Co-ordination becomes more difficult between divisions and departments as firm grows
Departments of firm may put its own interests over the interests of the whole company

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54
Q

Explain the external diseconomies of scale

A

As whole industry gets bigger demand for certain materials will increase causing prices to increase
Buying large amount of supplies may not decrease the price because if local supplies are inefficient the firm will have to buy more expensive supplies elsewhere

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55
Q

What are the two types of average costs

A

Short run
Long run

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56
Q

On a graph of average cost and output put together what does the long run average cost represent

A

The minimum possible average cost at each level of output

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57
Q

What is required for a short run average cost curve to meet the long run average cost curve and why might it not be possible in the short run

A

Firm has to be using the most appropriate mix of all the factors of production
Might not be possible because in the short run one of the factors of production is fixed

58
Q

What is the long run average cost curve dependent on

A

The internal economies and diseconomies of scale

59
Q

How does external economies and diseconomies of scale affect the long run average costs

A

External economies of scale will cause curve to shift downwards by reducing average costs at all output levels
External diseconomies of scale will cause curve to shift upwards

60
Q

What things other than external economies and diseconomies of scale cause the long run average cost curve to shift

A

Taxation (shift up or down)
New technology (shift down)

61
Q

What does return to scale mean

A

Describes the effect on output of increasing all factor inputs by the same proportion

62
Q

Explain the four types of return to scale

A

Increasing - increase in all factor inputs leads to a more than proportional increase in output
Decreasing - increase in all factor inputs leads to a less than proportional increase in output
Constant - increase in all factor inputs leads to a proportional increase in output

63
Q

Explain the link to returns of scale and economies of scale

A

Increasing returns of scale leads to economies of scale (More output than input so average costs will fall)
Decreasing returns of scale leads to diseconomies of scale (Less output than input so average costs will rise)

64
Q

What does MES stand for

A

Minimum Efficient Scale of Production

65
Q

What does MES stand for

A

The lowest level of output at which the minimum possible average costs can be achieved

66
Q

Where on a long run cost curve does the MES occur

A

When the long run average costs start to increase

67
Q

On a graph of average cost against output where is the optimal level of production

A

The MES

68
Q

What will be the relative size of the MES of an industry that has very high fixed costs

A

Very large MES

69
Q

What is total revenue

A

Total amount of money received, in a time period, from a firm’s sales

70
Q

What is average revenue

A

Revenue per unit solid

71
Q

What is marginal revenue

A

The extra revenue received as a result of selling the final unit of output

72
Q

How do you calculate total revenue

A

Total quantity sold x price

73
Q

How do you calculate average revenue

A

Total revenue / quantity sold

74
Q

How do you marginal revenue

A

Total revenue at a specific level of output - total revenue at one unit less the previous level of output

75
Q

What is average revenue equal to

A

Price

76
Q

What is a price taker

A

Firms that have no control over the price they set and the price is completely decided by the market

76
Q

What type of demand will a price taker have

A

It will have perfect elastic demand
If the quantity rises by any amount the demand will drop to zero

77
Q

What is the relationship between marginal revenue and average revenue with regards to a price taker

A

Marginal revenue = average revenue

78
Q

With a price taker firm what will the shape of the graph where revenue is put against quantity look like

A

A constant increase from the origin

79
Q

What is a price maker

A

Firms that have some power over the price they set

80
Q

What is the shape of the demand curve of a price maker

A

They have a downwards sloping curve

81
Q

When a demand curve is downwards sloping when is total revenue maximised and explain why

A

When PED = -1
To the left of the midpoint demand is elastic so decreasing price (moving towards the midpoint) will increase sales and increase revenue
To the right of the midpoint demand is inelastic so decreasing price won’t have as much as an effect on the sales
So the midpoint is the optimal point where total revenue is maximised

82
Q

When total revenue is maximised what is the value of the marginal revenue

A

MR = 0

83
Q

What is the equation for profit

A

Profit = total revenue - total cost

84
Q

What is normal profit

A

When the total revenue is equal to its total costs
Normal profit = 0

85
Q

When does normal profit occur

A

When the total revenue left over after decreasing the total costs is equal to the opportunity costs of the factors of production

86
Q

What is supernormal profit

A

When the total revenue is greater than the total costs

87
Q

What type of profit is required in the long run and why

A

Normal profit because its revenue is not covering all of the firms costs

87
Q

When does supernormal profit occur

A

Occurs when the revenue generated from using the factors of production currently used is more than the alternative ways

88
Q

Why might a loss making firm may not close in the short run

A

Because the losses may be due to paying the fixed costs
Whether a firm closes depends on how the total revenue compares to its variable costs

89
Q

In the long run when should a firm cease production (with regards to the relationship between the marginal costs, average total costs and average variable costs)

A

If price falls below the point where marginal cost and average total costs meet then the firm should exit the market

90
Q

If a firm is in the short run and the price remains between where the average variable costs and average total costs meet and where the marginal costs and average variable costs meet what should the firm do

A

They should continue to produce

91
Q

If a firm is in the short run and the price falls below where average total costs and marginal costs meet what should the firm do

A

Stop production immediately because variable costs are not being covered

92
Q

When is profit maximised

A

When marginal cost = marginal revenue

93
Q

What do economists normally assume about firms

A

They aim to maximise profits

94
Q

What should a firm do if marginal revenue is greater than marginal cost

A

It should produce more

95
Q

When is revenue maximised

A

When marginal revenue is equal to zero

96
Q

When is sales maximised

A

When average revenue = average costs

97
Q

In what period of time is profit maximised

A

In the long run because profit needs to be sacrificed in the short run in order to make a profit later on

98
Q

What is corporate social responsibility

A

Involves operating in a way that benefits society

99
Q

What is divorce of ownership from control

A

When a firm grows a owner will sell shares to shareholders and the directors will run the firm
This means the firm is no longer in control of the firm

100
Q

What problem can stem from the divorce of ownership from control

A

The principal-agent problem
This is when the shareholders pay a director to act in their interests

101
Q

How can the principal-agent problem be tackled by the owner

A

The owner can demand accountability for the directors where the directors are forced to justify the past and future actions
They could also offer incentives for directors to aim for profit maximisation

102
Q

What is satisficing

A

Trying to do just enough to satisfy important stakeholders, instead of aiming to maximise quantity such as profits

103
Q

Explain three ways that growth can increase profit

A

Increasing economies of scale - a firm might grow to reach the minimum efficient scale of produciton, where average costs are minimised
Increasing market share and reducing competition - if a firm controls a lagre part of the market they might gain some monopoly power that allows htem to set prices and make supernormal profits
Expanding into new markets - might try to sell its products in different countries

104
Q

What is internal growth

A

Growth as a result of a firm increasing the levels od the factors of production it uses

105
Q

Give an advantage to internal growth

A

A firms has control over exactly how this growth occurs

106
Q

What is external growth

A

Growth as a result of takeovers and mergers

106
Q

What is the downside of internal growth

A

Tends to be slow and expensive

107
Q

What is a takeover

A

When one firm buys another firm

108
Q

What is a merger

A

When two firms unite to form one company

109
Q

What is the advantage of external growth

A

Quicker and cheaper than interal growth

110
Q

What are the three ways external growth can happen

A

Horizontal integration
Vertical integration
Conglomerate integration

111
Q

What is horizontal integration

A

When two firms combine that are at the same stage of the production process of similar products

112
Q

What are the advantages of horizontal integration

A

Increase economies of scale
Reduce competition
Increase market share

113
Q

What is vertical integration

A

When two firms combine that are at different stages of the production process of the same product

114
Q

Explain the two types of vertical integration

A

Forward vertical integration:
- When a firm takes over a another firm that is further
forward in the production process
Backward vertical integration:
- When a firm takes over another firm that is further
back in the prodution process

115
Q

What is conglomerate integration

A

When two firms combine that are in completely unrelated markets

116
Q

What is the purpose of conglomerate mergers

A

Allow firms to diversify
This means that risk can be spread because another part of the firm’s profit can cover for it

117
Q

How can the growth of a firm lead to disadvantages

A

There will be an increase in staff - some staff will become redundant
The firms have different and incompatible objectives
A takeover can cause a lot of debt
The new larger firm can suffer from diseconomies of scale
A firm may overestimate the value of the business that it is takin over making it harder to make a return on investment

118
Q

What are the advantages ofa merger or a takeover to a customer

A

Company will experience economies of scale so prices will reduce
The combination of two companies can increase creativity and can lead to a production in superior products

119
Q

What are the disadvantages ofa merger or a takeover to a customer

A

Less choice
Reduction in competition can lead to higher prices
Less out output compared to if the firms were separate leading to increased prices

120
Q

What is a demerger

A

A breaking up a firm into separate firms

121
Q

Give five reasons why a firm may demerger

A

To release money to pay off loans
To release money to reinvest in the firm
The hoped-for benefits if the merger did’nt materialize
To prevent government intervention if they’re are seen as having monopoly power
Increase in share price

122
Q

Explain five the impacts of a demerger on a business

A

May become more efficient and be able to focus on its production process
Reduction of economies of scale but a possible reduction in diseconomies of scale
Greater independance
The market calue is likely to increase
Selling off an unprofitable part of a firm is difficult and may result at a huge loss

123
Q

Explain five the impacts of a demerger on a workers

A

Improvement in employee-manager relations as the firm has gotten smaller
More jobs created
Workers may lose morale if merger isn’t fully explained

124
Q

Explain five the impacts of a demerger on a consumers

A

Improve consumer choice as competition increases
Consumers will be less confused as to what each company does
Smaller firms will focus on the consumers needs more

125
Q

Explain why a firm may choose to stay small

A

Legal requirements become more expensive and complex
They may experience diseconomies of scale
Relationship with customers could become less personal
Larger firms can become complacent and become less efficient and focused on their operations
Larger firms may be less responsive to change and less flexible
Firms owner might not want the profit or risks of expanding
May want to avoid being taking over by larger firms

126
Q

Why might a firm be forced to stay small

A

Don’t have the finance to expand
Niche market so the demand is too small
Lack the skills or expertise to expand
May lack the resources cope with additional regulations

126
Q

What would a perfetly competitive market look like

A

Infinite number of supplier and consumers
Consumers have perfect information
Producers have perfect information
Products are identical
No barriers to entry or exit
Firms are profit maximisers

127
Q

In a perfetly competitive market what would every firm be with regards to price

A

A price taker

128
Q

In a perfetly competitive market what would be the relationship with a markets demand curve and the marginal utility and why

A

Demand curve = marginal utility
The worth of a good to a customer decreases as quantity increases due to law of diminishing marginal utility

129
Q

In a perfetly competitive market what would be the relationship with a markets supply curve and the marginal cost and why

A

Supply curve = Marginal cost
A producers’ marginal costs increase as quantity increases due to the law of diminishing returns

130
Q

What is allocative efficiency

A

When a good’s price is equal to what consumers want to pay for it

131
Q

Why does allocative efficency happen in a perfectly competitive market

A

The price mechanism ensuures that producers supply exactly what consumer demand

132
Q

What is marginal social cost

A

The cost to a society to producing one further unit

133
Q

At what point is allocative efficiency achieved

A

When price is equal to marginal social cost

134
Q

Explain type of profit doesn’t exist in the long run in a perfectly competitive market

A

Supernormal profit because any short term supernormal profits attract new firms because there are no barriers to entry

135
Q

Explain how supernormal profit is competed away

A

When supernormal profit is made new firms are attracted to the market
This causes the supply curve to shift to the right meaning the market price falls until all excess profits have been competed away

136
Q

What is the market price equal to

A

Average revenue

137
Q

If the market price falls below average-unit what does that mean for the firms profit

A

The firm is making less than normal profit

138
Q

In a perfectly competitive market what would happen in the short run if the firm is making less that normal profit

A

If the selling price is still above the firm’s average variable costs then the firm may continue to trade temporarily
If it falls below the average varaible costs then it will leave the market immediately

Economics (5 decks)

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