Theory of The Firm (Beginning of topic)

Question 1

What type of assumption is it that a firm a firm aims to profit maximise

Answer 1

A neo classical assumption

Question 2

Firms are owned by shareholders and run by the B.O.D, what is this known as

Answer 2

The divorce of ownership and control

Question 3

How do shareholders make money

Answer 3

Capital appreciation
Through dividends

Question 4

Why do shareholders want profit maximisation

Answer 4

Increased dividends

Question 5

Why do the B.O.D want profit maximisation

Answer 5

Job security (may mean less risk taking)
Salary maximisation (may mean growth over profit)

Question 6

What is an AGM

Answer 6

Annual General Meeting

Question 7

What occurs in an AGM

Answer 7

General meeting & the shareholders vote as to whether they want to re-elect the board of directors

Question 8

What is the definition of the long run

Answer 8

All factors of production are variable

Question 9

What is the definition of the short run

Answer 9

At least 1 factor of production (usually capital) is fixed

Question 10

What is the definition of production

Answer 10

Converting inputs into output

Question 11

What is productivity?

Answer 11

A measure of efficiency

Question 12

What is as a marginal cost

Answer 12

The extra cost incurred from producing one more unit of output

Question 13

What is marginal revenue

Answer 13

The extra revenue gained from selling one more unit of output

Question 14

Draw the diagram showing supernormal profit

Answer 14

Question 15

What is the profit maximising level of output

Answer 15

Where marginal costs (MC) are equal to marginal revenue (MR)

Question 16

What do marginal costs represent on the normal/supernormal profit diagram

Answer 16

Supply

Question 17

What does Average Revenue represent on the normal/supernormal profit diagram

Answer 17

Demand

Question 18

Why is the profit maximising point where marginal costs are equal to marginal revenue ?

Answer 18

Because at output levels before this point, you add more to revenue than cost, after this point you add more to cost than revenue

Question 19

What is normal profit

Answer 19

The minimum required to keep 1 factor of production in its present use

Question 20

What does supernormal profit provide the incentive for firms to do

Answer 20

Supernormal profit provides the incentives for factors of production to leave their current employment and re-deploy in the industry where supernormal profit can be made

Question 21

What is the main definition of a monopoly

Answer 21

A firm that is able to to influence price & quantity in the market
(They have market and pricing power)

Question 22

Draw the diagram showing normal profit

Answer 22

Question 23

What type of profit does a monopoly make in the long run

Answer 23

supernormal

Question 24

Why is a monopoly able to make supernormal profit in the long run

Answer 24

Due to barriers to entry

Question 25

What are barriers to entry

Answer 25

Factors which make entering a market difficult

Question 26

What is productive efficiency

Answer 26

The lowest point on the average cost curve

Question 27

Why are monopolies not productively efficient

Answer 27

They produce where mc=mr, not at the lowest point on the average cost curve

Question 28

How does the presence of supernormal profit lead to dynamic efficiency

Answer 28

Supernormal profit can lead to re-investment leading to lower long run average costs

Question 29

What is dynamic efficiency

Answer 29

Re-investment leading to lower long run average costs

Question 30

At what point is total output maximised

Answer 30

Where marginal revenue = 0
C

Question 31

When do firms shut down in the short run

Answer 31

If variable costs are not covered

If variable costs are covered with a little over, it makes sense to stay in the market as fixed costs such as rent will remain even if you leave the market due to lease agreements etc. So by staying in the market and covering even a little bit of the fixed costs the business owner is benefiting

If not even variable costs are covered as well as fixed costs then there’s it’s a loss when staying in the market

If variable costs are covered but no fixed costs are covered, it doesn’t matter which you pick financially the outcome is the same