Theme 3 Flashcards
What is profit maximisation?
A firm profit maximises when they are operating at the price and output which derives the greatest profit. Profit maximisation occurs where
marginal cost (MC) = marginal revenue (MR)
Where does revenue maximisation occur?
This occurs when MR = 0. In other words, each extra unit sold generates no extra revenue.
Where does sales maximisation occur?
**average costs (AC) = average revenue (AR). **
What is a price maker? AR?
A price maker is a participant in a market who has the ability to influence or set the price of a good.
AR curve is downward sloping
What is a price taker? Ar curve?
A price taker is a participant in a market who has no influence over the market price and must accept the prevailing price as given
AR curve is horizontal - This is because the price received for the good is constant
What is marginal revenue?
This is the extra revenue a firm earns from the sale of one extra unit. When marginal revenue is 0, total revenue is maximised.
What is AR?
this is the price each unit is sold for.
What is the law of diminishing marginal productivity?
Increasing a production input will result in smaller increases in output after a certain point
What is an internal economy of scale?
These occur when a firm becomes larger. Average costs of production fall as output increases
What is an external economy of scale?
These occur within an industry when it gets larger.
What are normal profits?
Normal profit is the minimum reward required to keep entrepreneurs
supplying their enterprise in the long run.
When will a profit maxing firm stop producing in the short run?
A firm which profit maximises continues to operate in the short run if P > AVC
Not fixed costs as they are variable.
Where is the shut down point for a profit maxing firm?
The shut-down point is P < AVC, when variable costs cannot be covered. This is at the lowest point on the AVC curve.
What happens in the long run to all factors of production?
They become variable.
Why might a firm want to grow?
Economies of scale which helps them to decrease their costs of production.
They will also be able to sell more goods and therefore make more revenue.
A larger firm will hold a greater share of their market. This will give them the ability to influence prices and restrict the ability of other firms to enter the market.
A larger firm will have more security as they will be able to build up assets and
cash which can be used in financial difficulties. Moreover, they are likely to sell a
bigger range of goods in more than one local/national market and so they will be
less affected by changes to individual products or places.
What is the principal agent problem?
Workers will want to max there own benefit
Owners/shareholders want to max ROI / short run profit max.
What is organic growth?
Organic growth is where the firm grows by increasing their output.
Organic growth may be too slow for directors who wish to maximise their salaries.
