Start of year: Economies and diseconomies of scale, fixed and variable factors, MES, Profit levels. Flashcards
What are fixed factors of production?
Resources that businesses have and can’t change in the short term
What are variable factors of production?
Resources that are fairly easy to change if you want to increase output
Explain the concept of diminishing returns
The point at which the marginal cost is greater than the marginal benefit
What is the minimum efficient (MES) scale?
The minimum size that a business must be in order to benefit from the maximum economies of scale available
Draw the minimum efficient scale (MES) on a graph
Q represents the mimnimum size that is efficient
Why does the MES vary from business to business?
The nature of the industry that the business is in means that the MES could be very small or very high.
For example a car manufacturer will have to be very large to benefit from economies of scale whereas a hairdressers doesn’t have many economies of scale available to it so can be much smaller.
Give 5 reasons why the LRAC curve might move from LRAC1 to LRAC2?
This would mean the business has become more efficient this may be because of:
- Technological developments
- Raw materials becoming cheaper
- Decreasing Taxes
- Increasing subsidies
- External economies of scale
Give 4 reasons why the LRAC curve might move from LRAC1 to LRAC3?
- Raw Materials more expensive
- Increasing tax
- Decreasing subsidies
- External diseconomies of scale
What are external economies of scale and in what instances are they most likely to occur in and why?
The whole industry is expanding and so every business in that industry has lower costs
Most likely to occur when the industry is concentrated into an area. For example most of the countries financial services are in London.
This area concentration makes it easier to attract skilled workers as they come to the place where the best companies for their proffession are.
It also reduces transport costs as suppliers are likely to set up nearby.
What are external diseconomies of scale?
The business attracts skilled workers due to external economies of scale however these skilled workers will demand high wages and if the business doesn’t give them the wages they want they might go to work at a competitor company.
What are internal diseconomies of scale?
The problems of running a business if it gets too big that cause efficiency to decrease and average total costs (ATC) to increase.
Name 4 internal diseconomies of scale
- As the business gets bigger more managers are required, increasing costs
- Decisions will take longer to be made due to a large chain of command
- High up managers are more likely to make mistakes on some decisions as they may have become distant from the day to day running of the business
- As the business grows the staff at the bottom feel their contribution is less important, become demotivated and less efficient causing costs to rise.
Name the 3 measures of revenue
What is a price taker and when does this type of business occur?
A price taker is a business that no matter how many units it sells will always get the same price for its products.
This is quite unsual but when it does occur it’s usually a very small business that faces a lot of competition and so have no control over the price of the product. (Product is elastic)
What are “normal” profits?
Total revenue is the same as total costs (breaking even)
Profit is maximised by producing up to the point where marginal costs are equal to marginal revenue
Calculated as total revenue - total costs (TC means TC - Oppurtunity cost)
What are supernormal profits?
Profit is being maximised by producing output to the point where marginal costs are quality to marginal revenue
OPLQ represents total revenue
Total costs for the business is area OCMQ
Supermormal profits are being made equal to area CPLM
What are subnormal profits?
Earning less than their normal profits, total revenue is less than total cost.
How can a business maximise it’s profits and what happens if they produce too much/too little?
A business must produce output until the marginal cost is equal to the marginal revenue for each extra unit they would produce, when the marginal cost becomes greater than the marginal revenue it’s not worth producing anymore as they’ll be making subnormal profits on each extra unit.
On the graph this is shown as the where the marginal cost curve crosses the demand curve.
