Theme 3 - Business behaviour and the labour market Flashcards
What are total costs (TC) and what is the formula?
All the costs involved in producing a given level of output = fixed costs + variable
What are total fixed costs (TFC)?
Costs that don’t change with output and remain constant e.g. rent. machinery
What are total variable costs (TVC)?
Costs that change directly with output e.g. materials
How do you calculate average (total) cost (ATC)?
Total costs/ output
How do you calculate average fixed cost (AFC)?
Fixed costs/ output
How do you calculate average variable cost (AVC)?
Variable costs/ output
What are marginal costs (MC)?
The extra costs of producing one extra unit of a good
How do you calculate marginal cost?
Change in total cost/ change in output OR current total costs - previous total costs
What is the difference between the short run and long run?
In the short run at least one factor of production is fixed and can’t be changed, the long run is when all factors of production become variable.
What is revenue?
The money earned from the sale of goods and service.
What is total revenue?
The total amount of money coming into the business through the sale of goods and services.
How do you calculate total revenue (TR)?
Price x quantity sold
What is average revenue?
Demand is the same as average revenue - the price that people are prepared to pay - the amount of money earned per individual unit or user
How do you calculate average revenue (AR)?
Total revenue/ output
What is marginal revenue?
The extra revenue that the firm earns from selling one more unit.
How do you calculate marginal revenue?
Change in total revenue/ change in output OR current total revenue - previous total revenue
What is the law of diminishing marginal returns?
As more of a variable factor is added to a fixed factor, the increase in output (or marginal output) eventually falls - employing an additional factor of production will eventually cause a relatively smaller increase in output.
- This only occurs in the short run when at least one factor of production is fixed (i.e. capital) and by increasing a variable factor (i.e. labour) will result in extra workers getting in each other’s way, reducing productivity and therefore output + returns.
- As more variable factors are added to fixed factors, a firm will reach a point where it has a disproportionate quantity of labour to capital, so marginal product of labour falls and marginal costs + variable costs rise.
What is the marginal product?
The extra output when one more factor of output is added.
What is a fixed factor?
The factor of production which can’t be changed in the short run, e.g. size of factory.
What are economies of scale?
Where long run average costs fall. Economies of scale occurs when the average costs per unit of output decrease with the increase in the scale of the output being produced by a firm in the long run.
What are diseconomies of scale?
When the average unit costs of production increase beyond a certain level of output.
How do firms short run profit maximise?
Firms produce where MC=MR
Why do firms profit maximise?
- To generate funds for investment e.g. to improve quality + cheaper as no interest compared to loans
- Help them survive a slowdown during recession
- Higher dividends, may attract new shareholders and investors + raise share price so more finance
- Safe + stable growth as it is sustainable growth
What is profit maximising?
When firms make as much profit as they can
What is sales maximising?
When firms sell as many physical products/services as they can
What is revenue maximising?
When firms bring in as much cash as they can
Why do firms sales maximise?
- So they become more well-known
- To sell to new customers/get new customers who will create loyalty
- Good for turning over stock quickly by selling more stock e.g. if perishable goods need to be sold
- Under time pressure to sell stock
- Boost market share
- Dominate the market
- Build reputation
Why do firms revenue maximise?
- To have a good cash flow - e.g. having sales can bring in more cash
- Attract a large customer base
- Fix ongoing liquidity issues
- Increase the share price so more investment
What is satisficing?
Making enough profit to keep shareholders happy, after which managers can aim for other objectives - reaching an acceptable target.
How do firms revenue maximise?
Firms would produce where MR=0
For revenue maximising what happens to prices compared to profit maximising?
Prices would be lower than when they were profit maximising since they are producing more
How do firms sales maximise?
Firms produce where AC=AR
- Will want to get the highest level of sales possible without making a loss
- Want to ensure sufficient returns to keep the owners happy so will aim for normal profits
For sales maximising what happens to prices compared to profit maximising?
Prices are lower and output is higher
What is efficiency?
Controlling inputs and maximising outputs
What is allocative efficiency?
Market is allocating goods effectively, it is a normal demand and supply curve
-Price = MC
What is productive efficiency?
Operating at lowest AC point
- When products are produced at lowest average cost so the fewest resources are used to produce each product - minimum resources used for maximum output
- In the short run this is MC=AC
What is x-efficient?
Costs are on the AC line as expected - produce at level required
What is dynamic efficiency?
Long term efficient use of Supernormal profit + invest profit back in to see more SNP
-Resources allocated efficiently over time
What is static efficiency?
Being efficient now (both productive + allocative efficiency) in the short term, current
What is x-inefficiency?
No where near as efficient with resources as firms should be - costs are higher than expected
-When firms fail to minimise their cost for that specific output
What are the characteristics of perfect competition/competitive markets?
- Large number of firms + buyers
- Freedom of entry + exit into and out of the industry
- Products are homogenous (identical)
- Consumers and producers have perfect knowledge about the market (all the same)
- Firms are price takers - have no control over the price they charge
- Each producer suppliers a very small portion of total industry output
What are firms in perfect competition assumed to do in the short and long run?
- Short run - profit maximise so produce at MC=MR it os possible for them to make SNP, normal profit or a loss
- Long run - can ONLY make normal profit
What is price discrimination?
Happens when a firm charges a different price to different groups of consumers for an identical good/service, for reasons not associated with costs of supply.
What are the three types of price discrimination?
- First-degree/perfect price discrimination
- Second-degree
- Third-degree
Explain each degree of price discrimination…
- First-degree discrimination involves selling a product at the exact price that each customers is willing to pay, so it changes for everyone.
- Second-degree price discrimination targets groups of consumers with lower prices made possible through bulk buying (economies of scale)
- Third-degree price discrimination sets different prices based on the demographic of subsets of a client base
e.g. adult tickets for movies are more expensive
