Theory of the Firm Flashcards
long-run average total cost graph and explanation
What are the five different types of economies of scale?
- managerial
- commerical
- financial
- risk-taking
- technical
managerial economies of scale
specialisation to oversee work
commerical economies of scale
when buy more of a product get better price
financial economies of scale
larger companies can borrow money at lower interest
risk-taking economies of scale
diversity of products = lower risk
technical economies of scale
larger products use less packaging
equation for accounting profit
Pi = TR - TC
profit = total revenue - total cost
normal profit
- return you could make from opportunity costs of investing money
- next best paying alternative return on money
- amount of profit a business person must recieve to stay in market in long run
economic profit
profit above level of normal profit
if accounting proft < normal profit
lose money
Graph for average fixed cost, average variable cost, average total cost, marginal cost and explanation
diminishing marginal returns
in system with fixed and variable inputs each additional unit of variable input yields less and less output
firm’s short run marginal cost curve will eventually increase
law of increasing costs
producing one more unit of output costs more and more variable units
Graph for average physical product and marginal physical product and explanation
initially specialization overcomes DMR then DMR takes over
when MPP above APP, APP goes up
when MPP below APP, APP goes down
in short run, profit maximising output — than revenue maximising level of profit
less
How do the graphs of total production and average/marginal production align?
- dotted line on the left indicates the point at which MP of new workers stops increases and begins o decline
- dotted line on the right indicates the point at which TP begins to decrease because MP of labor is negative
Graph showing TP and TVC and explanation
reflects DMR
beyond dotted line, TP increases at decreasing rate and TVC increases at an increasing rate because each worker adds less to firm’s output
Diseconomies of scale factors
Communication inefficiencies: too large so not enough communication - can lead to processes being duplicated unnecessarily
Office politics: managers in large companies focus on achieving personal goals rather than promoting best interests of firm, may employ incompetent workers to make themselves look better
Increased regulation: larger firms more likely to be regulated by government agencies, may put anti-monopoly policies in place which add to costs of production (significant legal costs)
Graph connecting average/marginal revenue and total revenue and explanation
How to profit maximise using the total revenue/total cost approach?
produce quantity at which difference between TR and TC is greatest
How to profit maximise using the marginal revenue/marginal cost approach?
- Graph for perfectly competitive firm?
- Graph for imperfectly competitive firm?
produce up to the level of output where MR = MC
- perfectly competitive = 2 lines
- imperfectly competitive = 3 lines
Where is profit maximisation and why?
MC = MR
- firm will continue to produce until marginal profit = 0
- MP = MR - MC
- where MC = MR, MP = 0
What is the difference between a break even point and a shut down point?
break-even = price at which business will make all normal profit, no economic profit shut-down = price at which loss is equal if you shut down or stay open
