Unit 7 - The firm and it's customers

Question 1

What are two types of growth strategies for firms

Answer 1

Low profit margins, increasing sales (Tesco, Amazon)
High profit margins, exclusivity (Apple, Luxury brands)

Question 2

What is the equation for profit

Answer 2

(P - AC)Q

TR - TC –>
PQ - (ACxQ) –>
(P - AC)Q

Question 3

What are Isoprofit curves

Answer 3

Its a line that represents combinations of Price (P) and Quantity (Q) that all supplies the same profit

Question 4

What are economies of scale, diseconomies of scale and constant returns to scale

Answer 4

Economies = When a firm grows it’s average costs decline // Average Cost (AC) decreases
Diseconomies = When a firm grows too large it’s average costs increase // AC increases
Constant = AC constant

Question 5

What is marginal cost

Answer 5

The cost of producing one addition unit

Corresponds to the gradient of the Total Cost line at that point

Question 6

What is price elasticity to demand

Answer 6

the percentage change of quantity demanded of good X as a response to a 1-percentage point change in the price of the same good

Elastic demand means demand changes heavily according to price (lower profit margins)
Inelastic demand means demand doesnt change that much according to price (higher profit margins )

Question 7

Why does economics of scale allow lower average costs

Answer 7

• Technological advantages: Large scale production fewer inputs per unit of good (increasing returns to scale)
• Costs advantages: fixed costs are distributed across a larger output such as advertising and research and development; they also gain more bargaining power over input costs
• Demand advantages: Network goods (facebook + instagram, Google + android, MS Windows + MS Teams)