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microeconomics > Theory of The Firm > Flashcards

Theory of The Firm Flashcards

1
Q

Short run definition

A

A time period during which at least one input is fixed and cannot be changed by the firm

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2
Q

Long run definition

A

A time period when all inputs can be changed- they are all variable

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3
Q

Marginal product

A

Measures the extra output per unit of labour

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4
Q

Marginal product equation

A

🔼 TP/ 🔼 unit of labour

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5
Q

Average product equation

A

TP/ units of labour

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6
Q

Theory of diminishing marginal utility

A

As more and more units of a variable input (e.g. labour) are added, the marginal product first increases, but there comes a point when additional units decrease marginal product

At output levels greater than DMR point, total costs rise faster than they were before

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7
Q

Why DMR/ DMU happens

A

Labour becoming less efficient/ productive (too many cooks in the kitchen)

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8
Q

Minimum efficient scale

A

= prod efficiency

The lowest pint on LRAC, the opt level of output as this is where costs are the lowest

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9
Q

How to calculate revenue

A

Price x quantity

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10
Q

Marginal revenue

A

The extra revenue a form earns from the sale of 1 extra unit (so when MR=0, TR is maximised

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11
Q

Marginal revenue equation

A

🔼 Total Rev/ 🔼Q

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12
Q

Average revenue equation

A

Total Rev/ Q

So price

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13
Q

Fixed costs

A

don’t change as output changes, arise from the use of fixed inputs eg rent, only in SR

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14
Q

Variable costs

A

Arise from the use of variable inputs. Change as output changes eg wages

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15
Q

Average revenue

A

The price each unit is sold for

So price, which is y D curve = AR curve

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15
Q

Why is AR horizontal when firms are price takers

A

Because perfectly elastic D for gds

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16
Q

Marginal costs

A

The extra cost of producing 1 more unit

17
Q

Total costs=

A

Fixed cost + variable costs
OR
ATC x Output

18
Q

ATC=

A

AFC + AVC

18
Q

Shut down when…

A

If Irma can continue to produce in SR if VCs are covered, so shut down point is when p is lower than AVC

18
Q

AFC=

A

TFC/ output

Fixed/increasing = a decreasing no.

19
Q

Averages on graphs

A

Have less extreme fluctuations, coz they factor in previous values, and have a bit of a lag

20
Q

MC=

A

🔼 TC/ 🔼Q

21
Q

When a firms variable costs increase…

When total fixed costs increase…

A

… both MC and AC curve shift

… only shift AC curve

22
Q

Economies of scale are

A

Reduction of LRAC as output increases

23
Q

Internal economies of scale

A

Average costs of prod fall as output rises, when a business gets larger, they lower AC coz total quantity rising faster than total costs

24
Q

Diseconomies of scale

A

When output passes a certain point and ACs start to increase per extra unit of output produced

25
Q

Types of internal eos

A 
Risk bearing
Financial
Managerial
Technological
Marketing
Purchasing
26
Q

Risk bearing eos

A

Large firms have range of products, spreads of cost of uncertainty

27
Q

Financial eos

A

Banks more willing to lend loans cheaper to large firms as less risky (so can get cheaper credit)

28
Q

Managerial eos

A

Can specialised and divide labour and employ specialists so ⬇️ AC

29
Q

Technological eos

A

Big firms can invest into more advanced/ productive tech/machinery and capital, so ⬇️AC

30
Q

Marketing eos

A

Bulk buy adverts, the AC of advertising per unit is less than that of a smaller firm

31
Q

Purchasing eos

A

Can buy raw materials in bulk, so each unit costs them less (eg supermarkets have more buying power than corner shops, so can negotiate better deals)

32
Q

External economies of scale

A

Occur when an industry gets larger, eg local roads might be improved so transport costs full, or component suppliers/ R and D firms move closer

33
Q

Diseconomies of scale types

A

Control
Coordination
Communication

34
Q

Diseconomies of scale, control

A

It becomes harder to monitor how productive the workforce is

35
Q

Diseconomies of scale, coordination

A

V complicated to coordinate thousands of workers

36
Q

Diseconomies of scale, communication

A

Workers could feel alienated leading to fall in productivity and increase in AC as they lose motivation

37
Q

Normal profit

A

The min reward, covers OC of investing funds into firms and not elsewhere, when TR=TC

38
Q

Supernormal profit

A

Exceeds value of OC of investing funds into firms

microeconomics (10 decks)

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