Section 3: Business Economics Flashcards
1
Q
What is production
A
Manufacturing something in order to sell it
2
Q
What are the two types of inputs
A
Tangible
Intangible
3
Q
What is productivity
A
The output per unit of input employed
4
Q
What is labour productivity
A
The output per worker or output per hour worked
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
6
Q
Give 4 factors that improve labour productivity
A
Better training
More experienced
Improved technology
Specialisation
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
8
Q
Name the main economist who endorses the division of labour
A
Adam Smith
9
Q
Give 5 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
10
Q
Give 4 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
11
Q
What are the 4 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
12
Q
What is a firm
A
Any sort of of business organisation
13
Q
What is an industry
A
All the firms providing similar goods and services
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
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
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
17
Q
What is the long run
A
The period of time all of a firm’s factors of production is varied
18
Q
What are fixed costs
A
Don’t vary with output in the short run
19
Q
What are variable costs
A
Costs vary with output
20
Q
In the long run what type of costs are there
A
In the long run all costs are variable
21
Q
What is total cost
A
All the costs involved in producing a particular level of output
22
Q
How do you work out the total cost for a particular output level
A
Total Fixed Costs + Total Variable Costs
23
Q
What is the average cost
A
Cost per unit produced
24
Q
How do you work out the average fixed cost
A
Total Fixed Cost / Quantity
25
How do you work out the average variable cost
Total Variable Cost / Quantity
26
What is marginal cost
The extra cost incurred as a result of producing the final unit of output
27
Which type of cost exclusively affects marginal cost
Variable cost
28
How do you work out the marginal cost
Total Cost (at the current output level) - Total Cost (at one unit less)
29
What is general formula for marginal cost
Change in TC / Change in Quantity
30
Describe the shape of the marginal cost curve on a graph of cost against output
Decreases initially when output increases then begins to increase in the short run
This is because of the law of diminishing returns
31
In relation to the marginal cost curve when does average cost reach its minimum
When the AC curve meets the MC curve
32
Explain the relationship between the marginal cost curve and the average cost curve
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
33
Where on a graph of cost against output is there a minimum in productive efficiency
When marginal cost is equal to average cost
34
In relation to the marginal cost curve when does average variable cost reach its minimum
When the AVC curve meets the MC curve
35
Describe and explain the average fixed cost curve on a graph of cost against output
Falls as output rises because the total fixed cost is spread across the greater output
36
When does the law of diminishing returns apply
In the short run because at least one factor stays fixed
37
What is the marginal product
The additional output produced by adding one more unit of a factor input
38
Describe and explain the marginal product curve
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
39
What is the law of diminishing returns
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
40
What is the relationship between the marginal cost curve and the marginal product curve and explain why
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
41
What is the law of variable proportions
The law of diminishing returns
42
What is economies of scale
Cost reductions that occur when companies increase production
43
What are the two categories that economies of scale fall in
Internal - involve changes within a firm
External - involve changes outside a firm
44
What are the 6 types of internal economies of scale
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
45
Explain Technical Economies of Scale (4 aspects)
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
46
Explain Purchasing Economies of Scale (2 aspects)
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
47
Explain Managerial Economies of Scale
Larger firms can employ specialist manager which will lead to better decision making which will lead to reduced cost
48
Explain Financial Economies of Scale
Large firms can borrow money at a lower rate of interest - banks see it as less risky
49
Explain Risk-bearing Economies of Scale
Larger firms can diversify
Diversification leads to a more predictable overall demand
50
Explain Marketing Economies of Scale (3 aspects)
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
51
Explain External Economies of Scale (3 aspects)
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
52
Give 3 ways extremely successful firms gain monopoly power
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
53
Explain the Internal Diseconomies of Scale (5 aspects)
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
54
Explain the External Diseconomies of Scale (2 aspects)
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
55
What are the 2 types of average costs
Short run
Long run
56
On a graph of average cost and output put together what does the long run average cost represent
The minimum possible average cost at each level of output
57
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
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
What is the long run average cost curve dependent on
The internal economies and diseconomies of scale
59
Give 2 ways external economies and diseconomies of scale affect the long run average costs
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
What 2 things other than external economies and diseconomies of scale cause the long run average cost curve to shift
Taxation (shift up or down)
New technology (shift down)
61
What does return to scale mean
Describes the effect on output of increasing all factor inputs by the same proportion
62
Explain the 4 types of return to scale
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
Explain the link to returns of scale and economies of scale
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
What does MES stand for
Minimum Efficient Scale of Production
65
What does MES stand for
The lowest level of output at which the minimum possible average costs can be achieved
66
Where on a long run cost curve does the MES occur
When the long run average costs start to increase
67
On a graph of average cost against output where is the optimal level of production
The MES
68
What will be the relative size of the MES of an industry that has very high fixed costs
Very large MES
69
What is total revenue
Total amount of money received, in a time period, from a firm's sales
70
What is average revenue
Revenue per unit solid
71
What is marginal revenue
The extra revenue received as a result of selling the final unit of output
72
How do you calculate total revenue
Total quantity sold x price
73
How do you calculate average revenue
Total revenue / quantity sold
74
How do you marginal revenue
Total revenue at a specific level of output - total revenue at one unit less the previous level of output
75
What is average revenue equal to
Price
76
What is a price taker
Firms that have no control over the price they set and the price is completely decided by the market
76
What type of demand will a price taker have
It will have perfect elastic demand
If the quantity rises by any amount the demand will drop to zero
77
What is the relationship between marginal revenue and average revenue with regards to a price taker
Marginal revenue = average revenue
78
With a price taker firm what will the shape of the graph where revenue is put against quantity look like
A constant increase from the origin
79
What is a price maker
Firms that have some power over the price they set
80
What is the shape of the demand curve of a price maker
They have a downwards sloping curve
81
When a demand curve is downwards sloping when is total revenue maximised and explain why
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
When total revenue is maximised what is the value of the marginal revenue
MR = 0
83
What is the equation for profit
Profit = total revenue - total cost
84
What is normal profit
When the total revenue is equal to its total costs
Normal profit = 0
85
When does normal profit occur
When the total revenue left over after decreasing the total costs is equal to the opportunity costs of the factors of production
86
What is supernormal profit
When the total revenue is greater than the total costs
87
What type of profit is required in the long run and why
Normal profit because its revenue is not covering all of the firms costs
87
When does supernormal profit occur
Occurs when the revenue generated from using the factors of production currently used is more than the alternative ways
88
Why might a loss making firm may not close in the short run
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
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)
If price falls below the point where marginal cost and average total costs meet then the firm should exit the market
90
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
They should continue to produce
91
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
Stop production immediately because variable costs are not being covered
92
When is profit maximised
When marginal cost = marginal revenue
93
What do economists normally assume about firms
They aim to maximise profits
94
What should a firm do if marginal revenue is greater than marginal cost
It should produce more
95
When is revenue maximised
When marginal revenue is equal to zero
96
When is sales maximised
When average revenue = average costs
97
In what period of time is profit maximised
In the long run because profit needs to be sacrificed in the short run in order to make a profit later on
98
What is corporate social responsibility
Involves operating in a way that benefits society
99
What is divorce of ownership from control
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
What problem can stem from the divorce of ownership from control
The principal-agent problem
This is when the shareholders pay a director to act in their interests
101
Give 2 ways the principal-agent problem can be tackled by the owner
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
What is satisficing
Trying to do just enough to satisfy important stakeholders, instead of aiming to maximise quantity such as profits
103
Explain 3 ways that growth can increase profit
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
What is internal growth
Growth as a result of a firm increasing the levels od the factors of production it uses
105
Give an advantage to internal growth
A firms has control over exactly how this growth occurs
106
What is external growth
Growth as a result of takeovers and mergers
106
What is the downside of internal growth
Tends to be slow and expensive
107
What is a takeover
When one firm buys another firm
108
What is a merger
When two firms unite to form one company
109
What is the advantage of external growth
Quicker and cheaper than interal growth
110
What are the 3 ways external growth can happen
Horizontal integration
Vertical integration
Conglomerate integration
111
What is horizontal integration
When two firms combine that are at the same stage of the production process of similar products
112
Give 3 advantages of horizontal integration
Increase economies of scale
Reduce competition
Increase market share
113
What is vertical integration
When two firms combine that are at different stages of the production process of the same product
114
Explain the 2 types of vertical integration
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
What is conglomerate integration
When two firms combine that are in completely unrelated markets
116
What is the purpose of conglomerate mergers
Allow firms to diversify
This means that risk can be spread because another part of the firm's profit can cover for it
117
Give 5 ways the growth of a firm leads to disadvantages
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
Give 2 advantages of a merger or a takeover to a customer
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
Give 3 disadvantages of a merger or a takeover to a customer
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
What is a demerger
A breaking up a firm into separate firms
121
Give 5 reasons why a firm may demerger
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
Explain 5 the impacts of a demerger on a business
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
Explain 5 the impacts of a demerger on a workers
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
Explain 5 the impacts of a demerger on a consumers
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
Explain why a firm may choose to stay small
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
Why might a firm be forced to stay small
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
What would a perfetly competitive market look like (6 aspects)
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
In a perfetly competitive market what would every firm be with regards to price
A price taker
128
In a perfetly competitive market what would be the relationship with a markets demand curve and the marginal utility and why
Demand curve = marginal utility
The worth of a good to a customer decreases as quantity increases due to law of diminishing marginal utility
129
In a perfetly competitive market what would be the relationship with a markets supply curve and the marginal cost and why
Supply curve = Marginal cost
A producers' marginal costs increase as quantity increases due to the law of diminishing returns
130
What is allocative efficiency
When a good's price is equal to what consumers want to pay for it
131
Why does allocative efficency happen in a perfectly competitive market
The price mechanism ensuures that producers supply exactly what consumer demand
132
What is marginal social cost
The cost to a society to producing one further unit
133
At what point is allocative efficiency achieved
When price is equal to marginal social cost
134
Explain type of profit doesn't exist in the long run in a perfectly competitive market
Supernormal profit because any short term supernormal profits attract new firms because there are no barriers to entry
135
Give 2 reasons why supernormal profit is competed away
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
What is the market price equal to
Average revenue
137
If the market price falls below average-unit what does that mean for the firms profit
The firm is making less than normal profit
138
In a perfectly competitive market give two things that would happen in the short run if the firm is making less that normal profit
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
