Theory of the Firm Flashcards
The Law of Diminishing Marginal Returns
As one or more units of variable input (e.g. labour) are added to one or more fixed inputs (e.g. land) the marginal product of the variable input increases at first, but eventually begins to decrease.
(This law only holds in the short run)
What is meant by “decreasing returns to scale”?
Decreasing returns to scale occur if the production process becomes less efficient as production is expanded, as when a firm becomes too large to be managed effectively as a single unit.
Economies of scale
Economies of scale (long-run concept) are decreases in average costs of production over the long run as a firm increases its factors of production.
Disceconmies of scale
Increases in average costs over the long run as factors of production are increased.
A monopoly
- a single firm
- selling a product with no substitutes
- with high barriers to entry
Perfect Competition
- Many small competing firms.
- Similar Products Sold.
- Equal Market Share. (i.e. firms are price takers)
- Buyers have full information.
- Low/no barriers to entry.
What is a cartel?
A cartel is a formal agreement among firms in an oligopolistic industry in order to limit competition
What is an economy of scale?
Economies of scale occurs when more units of a good or service can be produced on a larger scale with (on average) fewer input costs/ average costs.
Features of Perfect Competition
- A very large number of firms
- All selling the same product
- No barriers to entry
- perfect information
The condition for profit maximisation?
Where marginal revenue (MR) equals marginal cost (MC)
Profit per unit?
Average revenue (AR) - Average costs (AC)
Total Profit?
Total revenue (TR) - Total costs (TC)
The condition for normal profit?
Where Average revenue is equal to average costs
Features of a Monopoly
- single firm
- selling a product with no substitutes
- high barriers to entry
Features of Monopolistic Competition
- large number of firms
- no barriers to entry
- differentiated product
