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Economics Micro - No Diagrams > Theme 3 CC1 - Background to theory of the firm > Flashcards

Theme 3 CC1 - Background to theory of the firm Flashcards

1
Q

Define the Short run

A

A Period of time where at least one factor of production is fixed

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2
Q

Define LR

A

A period of time where all factors of production are variable

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3
Q

Define productivity

A

Output per unit of input

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4
Q

Explain marginal product

A

The additional output produced by an additional unit of input

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5
Q

What causes increasing marginal returns if a second worker is employed?

A

Specialisation - can divide up work; capacity is better utilised

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6
Q

What causes DMR?

A

Fixed units become a constraint on production e.g. more workers too many people - get in each other’s way or waiting for capital

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7
Q

When does DMR occur on a graph?

A

Max point of MP

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8
Q

What is the Law of diminishing Marginal returns?

A

In the SR, when variable factors of production are added to a stock of fixed factors of production, total/marginal product will initially rise and then fall.

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9
Q

How is Average product calculated?

A

TP/L

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10
Q

How is MP calculated?

A

🔺TP/🔺L

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11
Q

What is the most commonly fixed Factor of production?

Most common variable input?

A

Land, capital

Labour

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12
Q

Define fixed costs

A

Costs which do not vary as the level of production increases or decreases

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13
Q

Define variable costs

A

Costs which vary directly in proportion to the level of output of a firm

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14
Q

Define semi-variable costs

A

Costs that vary with output but not in direct proportion i.e. they have both fixed and variable elements

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15
Q

Define Total cost and give equation

A

The cost of producing any given level of output

TC= TVC + TFC

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16
Q

Why is the TVC curve the shape it is?

A

Due to DMR, initially increasing marginal returns (specialisation - low costs) then DMR as gradient rises

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17
Q

Define Average cost and give equation

A

The average cost of production per unit

ATC/AC= TC/Q

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18
Q

How is Average variable cost and Average fixed cost calculated?

A

AVC=TVC/Q

AFC=TFC/Q

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19
Q

Define Marginal cost and give equation

A

The cost of producing an extra unit of output or the change in total cost divided by the change in output

MC=🔺TC/🔺Q=TCn - TCn-1

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20
Q

Define Economies of Scale

A

A fall in the long run average costs of production as output rises.

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21
Q

What is constant returns to scale?

A

Occur when a firm experiences (minimum) constant LRAC as output increases.

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22
Q

What is minimum efficient scale of production?

A

The lowest level of output at which LRAC is minimised e.g. start of constant returns to scale (plateau).

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23
Q

Define diseconomies of scale

A

A rise in the LRAC of production as output rises

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24
Q

What is internal economies of scale?

A

A fall in LRAC of production as output rises within a firm, due to advantages internal to the firm.

25
Q

Give acronym and sources of internal economies of scale

A

Really Fun Mums Try Making Pies

Risk-bearing EOS
Financial EOS
Managerial EOS
Technical EOS
Marketing EOS
Purchasing EOS

26
Q

Explain Risk-bearing EOS

A

Larger firms able to diversify into more products/markets, reducing risk of collapse and risk to investors.

27
Q

Explain Financial EOS

A

Larger firms considered more credit worthy, easier access to funds e.g. banks charge lower interest rates.

28
Q

Explain Managerial EOS

A

Specialist managers (division of labour) using specialist equipment

29
Q

Explain Technical EOS

A

a) Large scale business can afford to invest in specialist machinery
b) Specialisation of workforce to increase productivity.
c) Container principle - Increase height/width of a tanker/building leads to more than proportionate increase in cubic capacity. In transport, revenue from shipments>cost of increase in capacity.

30
Q

Explain Marketing EOS

A

Large firms more able to afford larger, more effective advertising campaigns.

31
Q

Explain Purchasing EOS

A

Large firms able to ‘bulk buy’ and therefore negotiate lower unit costs.

32
Q

Define Internal Diseconomies of scale

A

A rise in LRAC of production as a firm expands beyond its optimum size

33
Q

Give sources of Internal diseconomies of scale with way to remember

A

The 4 C’s
Control
Co-ordination
Co-operation
Communication

34
Q

Explain control as a source of internal diseconomies of scale

A

Difficult to monitor productivity & quality of output of thousands of employees

35
Q

Explain co-ordination as a source of internal diseconomies of scale

A

Difficult to co-ordinate complicated production processes across many factories in different locations & countries, and contracts with suppliers.

36
Q

Explain co-operation as a source of internal diseconomies of scale

A

Workers may lack motivation, not feeling important in big organization, therefore productivity may fall.

37
Q

Explain communication as a source of internal diseconomies of scale

A

Difficulties between large business - leading to poor decision making and higher costs.

38
Q

Give 3 ways to avoid diseconomies of scale

A
  1. Developments in human resource management e.g. monitor workers, training, promotion, general support of staff.
  2. Incentives for workers leading to higher productivity e.g. performance-related pay schemes
  3. Outsourcing of manufacturing and distribution can help a business to supply ever-distant markets, reducing costs whilst retaining control over production.
39
Q

Define External economies of scale

A

Falling average costs of production, shown by downwards shift in LRAC curve, which results from a growth in the size of the industry within which a firm operates.

40
Q

Give 3 industry changes external economies of scale lead to?

A
  • Better local transport network
  • Lower training costs: pool of skilled workers
  • Research and development facilities in local universities
  • Component suppliers and other support businesses in the area.
41
Q

Define external diseconomies of scale

A

Rising average costs of production, shown by an upward shift in the LRAC curve, which results from a growth in the size of the industry beyond its optimal size.

42
Q

Define revenue and give equation

A

The income a firm recieves from selling its output

TR= PXQ=ARXQ

42
Q

Give equation for average revenue and identify the curve

A

AR=TR/Q=(PXQ)/Q=P
Known as the Demand curve

43
Q

Define marginal revenue and give equation

A

The additional revenue from selling an additional unit of output
MR=🔺TR/🔺Q

44
Q

What is a price taker compared to a price maker?
How can each be identified?

A
  • A price taker is a firm which has no influence on the market price and must sell all its output at market price. Identified by TR curve as a straight line
  • A price maker is a firm which is able to select the price at which it sells its output. Identified by TR curve as a parabola.
45
Q

When does a firm maximise total revenue?

A

When MR=0

46
Q

What is the relationship between AR and MR curve?

A

MR is twice as steep as AR

47
Q

How is profit worked out?

A

Profit (Π) = Total Revenue-Total Costs

48
Q

What are financial costs?

A

Costs actually paid out but by the firm e.g. rent, wages, raw materials

49
Q

Define normal profit

A

The profit that the firm could make by using its resources in their next best use (opportunity cost). Referred to as ‘break-even’ where TR=TC

50
Q

How is economic cost worked out?

A

Financial cost+ normal profit

51
Q

What is subnormal vs supernormal profit

A

Subnormal - Profit (‘losses’) occur when TC>TR
Supernormal - Profit (abnormal or economic profit) above normal profit e.g. TR>TC

52
Q

How do accountants and economists work differently?

A

Accountants just look at explicit (Financial costs) whereas economists look at implicit costs also (e.g. opportunity cost)

53
Q

How can we work out marginal profit?

A

MR-MC

54
Q

When is profit maximised?

A

Where MR=MC,

At the largest gap of TR-TC

55
Q

What are the functions of profit?

A
  • Profit is the return of the entrepreneur for risk-taking.
  • Dividends are paid out to shareholders to encourage them to hold shares. Fall in profit will cause shareholders to sell share.
  • Measure of success of business and a comparison between businesses.
  • Profit acts as a market signal
56
Q

Why is AR curve downward sloping for price makers?

A

AR= Demand curve, in monopolist industry therefore demand is downward sloping.
- Trade off between price and Quantity sold.

57
Q

Price maker - Why is MR downward sloping and below AR curve?

A

Firms must reduce price to sell more units
As price falls demand increases

Economics Micro - No Diagrams (5 decks)

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