Theme 3 Flashcards
What is profit maximisation?
Where the firm is making the most profit, where TC and TR are the greatest distance apart, where MC=MR
What is normal profit?
Minimum profit required to keep factors of production in their current use in the long run, where AC=AR or TC=TR
What is supernormal profit?
When profit is achieved in excess of the costs incurred, any output where AC is less than AR
What is the short run shut down point?
Where AR=AVC, a loss making firm can continue to operate in the short run as long as there AR is greater than AVC (price per unit is greater than cost of making product)
Why must a firms fixed costs be paid regardless of the level of output?
If we assume these costs can’t be recovered, if the firm shuts down then the loss would be greater than if the firm weren’t to shut down
What could a firm do in the long run if it is making a loss in the short run?
Either exit the industry or let other firms leave the market, allow the market price to increase and they earn normal profit
What is allocative efficiency?
Output level where price equals the MC of production, where the cost of product bought equals the price of product, where AR=MC
What is productive efficiency?
Where a firm combines its labour and capital optimally to produce maximum output at minimum costs, consumers also receive the lowest prices, where AC=MC
What is dynamic efficiency?
The optimal rate of R&D in order to improve production processes and efficiency overtime and reduce long run average cost
What is the condition and consideration for firms to attempt dynamic efficiency?
Need supernormal profits and must consider the market (E.g. is it a perfect competition where there’s perfect info)
What is X-inefficiency?
When a lack of competition in a market means that ACs are higher than they would be with competition
Define a barrier to entry
Anything that restricts entry into a market and therefore enables a firm to maintain monopoly power
Give two examples of structural barriers to entry
High capital expenditure and regulation and licenses
Give two examples of strategic barriers to entry
Vertical integration and brand loyalty
Define patents
Government enforced property rights valid for 12-20 years
Define brand proliferation
Developing and maintaining a brand to differentiate a product from the rest
Define sunk costs
Costs that cannot be recovered if a business decides to leave an industry e.g. advertising
Give two positives of monopolies
Quality product, unit costs lower
What are the conditions for a firm to implement price discrimination policies?
Seller must be a price maker, firm must able to distinguish between groups of customers and prevent seepage
Define first degree price discrimination
Where every customer pays the maximum they would pay
Define second degree price discrimination
Customers who purchase larger quantities get lower prices per unit
Define third degree price discrimination
When a firm charges different prices for the same product to different segments of the market
What are the three conditions for price discrimination?
Monopoly power, possible segmentation among customers and can firm prevent seepage
What is a dominant strategy?
Where the same policy is suggested as best for both parties regardless of what policy the other adopts
Define first mover advantage
By being first to enter a new market, a business gains a commercial advantage over its actual and potential rivals leading to higher profits over time
Define overt collusion
Formal, open and legal agreement by firms to collude
Define covert collusion
Little or any evidence of collusion (illegal)
Define tacit collusion
Accidental collusion where firms might follow same pricing policy or where firms undergo actions that are likely to minimise a response from another firm
What is predatory pricing?
Setting AR below AVC, aims to remove competition
What is limit pricing?
Set AR = AC, no supernormal profits
Define the law of diminishing marginal returns
In the short run, employing an additional factor of production causes a relatively smaller increase in output
