Theory of The Firm

Question 1

Short run definition

Answer 1

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

Question 2

Long run definition

Answer 2

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

Question 3

Marginal product

Answer 3

Measures the extra output per unit of labour

Question 4

Marginal product equation

Answer 4

🔼 TP/ 🔼 unit of labour

Question 5

Average product equation

Answer 5

TP/ units of labour

Question 6

Theory of diminishing marginal utility

Answer 6

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

Question 7

Why DMR/ DMU happens

Answer 7

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

Question 8

Minimum efficient scale

Answer 8

= prod efficiency

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

Question 9

How to calculate revenue

Answer 9

Price x quantity

Question 10

Marginal revenue

Answer 10

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

Question 11

Marginal revenue equation

Answer 11

🔼 Total Rev/ 🔼Q

Question 12

Average revenue equation

Answer 12

Total Rev/ Q

So price

Question 13

Fixed costs

Answer 13

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

Question 14

Variable costs

Answer 14

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

Question 15

Average revenue

Answer 15

The price each unit is sold for

So price, which is y D curve = AR curve

Question 15

Why is AR horizontal when firms are price takers

Answer 15

Because perfectly elastic D for gds

Question 16

Marginal costs

Answer 16

The extra cost of producing 1 more unit

Question 17

Total costs=

Answer 17

Fixed cost + variable costs
OR
ATC x Output

Question 18

ATC=

Answer 18

AFC + AVC

Question 18

Shut down when…

Answer 18

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

Question 18

AFC=

Answer 18

TFC/ output

Fixed/increasing = a decreasing no.

Question 19

Averages on graphs

Answer 19

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

Question 20

MC=

Answer 20

🔼 TC/ 🔼Q

Question 21

When a firms variable costs increase…

When total fixed costs increase…

Answer 21

… both MC and AC curve shift

… only shift AC curve

Question 22

Economies of scale are

Answer 22

Reduction of LRAC as output increases

Question 23

Internal economies of scale

Answer 23

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

Question 24

Diseconomies of scale

Answer 24

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

Question 25

Types of internal eos

Answer 25

``` Risk bearing Financial Managerial Technological Marketing Purchasing ```

Question 26

Risk bearing eos

Answer 26

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

Question 27

Financial eos

Answer 27

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

Question 28

Managerial eos

Answer 28

Can specialised and divide labour and employ specialists so ⬇️ AC

Question 29

Technological eos

Answer 29

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

Question 30

Marketing eos

Answer 30

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

Question 31

Purchasing eos

Answer 31

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)

Question 32

External economies of scale

Answer 32

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

Question 33

Diseconomies of scale types

Answer 33

Control Coordination Communication

Question 34

Diseconomies of scale, control

Answer 34

It becomes harder to monitor how productive the workforce is

Question 35

Diseconomies of scale, coordination

Answer 35

V complicated to coordinate thousands of workers

Question 36

Diseconomies of scale, communication

Answer 36

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

Question 37

Normal profit

Answer 37

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

Question 38

Supernormal profit

Answer 38

Exceeds value of OC of investing funds into firms