Theme 3 Flashcards
Total Revenue =
Price x Quantity
Average Revenue =
Total Revenue / Quantity
Marginal Revenue =
Change in Total Revenue / Change in Quantity
Total Costs =
Fixed Costs + Variable costs
Average Costs =
Total Costs / Quantity
Marginal Costs =
Change in Total Costs / Change in Quantity
Profit =
Total Revenue - Total Costs
If profit equals 0, what is it?
Normal profit
If profit is greater than 0, what is it?
Supernormal profit
Marginal Productivity defintion
The amount produced by each additional worker. = Change in output / Change in workers
If marginal productivity falls what will rise?
Marginal Costs
Internal economies of scale examples:
Fun - Financial
Mums - Managerial
Try - Technical
Making - Marketing
P - Purchasing
External economies of scale definition
Cost savings outside of a firm but within an industry i.e. better transportation networks
Diseconomies of scale
Average cost of production increases as output increases
Minimum efficient scale definition
Minimum level of output needed for a business to fully exploit economies of scale
At what point is profit maximisation on a monoply diagram?
MR = MC
At what point is revenue maximisation on a monoply diagram?
MR = 0
At what point is sales maximisation on a monoply diagram?
ATC = AR
At what point is satificing on a monoply diagram?
Sales max to price. Should form a triangle
What is productive efficiency?
The lowest point of the average cost curve
What is allocative efficiency?
When a firm produces at a point where economics welfare is maximised. (Supply meets demand)
What is dynamic efficiency?
When a firm reinvests its profits to become more efficient
What is being x-inefficient/efficient?
Costs being higher/lower than they should be
When does a firm have static efficiency?
When it is allocatively and dynamically efficient
Characteristics of a monoply (5)
Firm is the industry - the whole output is by the firm
Barriers to entry
No substitue goods
Profit maximise
Price maker
Benfefits and drawbacks of a monoply to a consumer
- Benefits: Dynamically efficient-> economies of scale -> lower prices, Innovation -> more choice
- Drawbacks: Not allocatively efficient, restrict output -> drive up price, productively inefficieny, x-inefficient
Benefits and drawbacks of a monoply to firms
- Benefits: Exploit economies of scale -> lower costs, good for innovation, faster rate of tech development -> reduce costs -> better products
- Drawbacks: X-inefficient -> high costs -> lower profits, productively inefficient
Benefits and drawbacks of a monoply to workers
- Benefits: Job security
- Drawbacks: Low wages (monopsony power), deskilling (structural unemployment)
Benefits and drawbacks of a monopy to suppliers
- Benefits: Guranteed contracts to supply
- Drawbacks: Lower prices offered due to monoply power (monopsony power)
Price discrimination definition
When a firm with market power charges different prices for an identical product (i.e. age, time of day, geography)
Conditions needed to price discriminate (3)
Market power
No resale
Segregate the market between consumers with different willingness to pay and with different price elasticity of demand
What is cross-subsidisation?
Those who pay a higher price, subsidise those who pay a lower price (equitable)
Price discrimination pros and cons
Pros: Profitable -> higher total revenue, larger output, cross subsidisation -> poorer customers, manages demand, reinvest profits -> long-term benefits of increased dynamic efficiency + lower prices
Cons: Unfair, predatory pricing, decline in consumer surplus
What is a natural monoply?
When competition would be inefficient as it would increas costs i.e. railways, water companies
Characterisitics of a natural monoply
High capital cost to set up
Duplication is unecessary and wasteful
The MES does not occur until an extremely high level of output as the economies of scale do not dimmish in the forseable future
Perfectly comeptitive market characteristics
Large number of buyers and sellers
Produce homogeneous goods (all products the same)
No one firm or individual buyer is large enough to affect market price
Factors of production are perfectly mobile
Customers and firms have perfect knowledge
No barriers to exit or entry
Examples: foreign exchange markets, agricultural markets, internet related markets
What is the shutdown price and why may firms stay in the market if they make a loss?
AR (P) < AVC
In case other firms leave
