Week 7a Flashcards
Short run
Period of time where there’s at least one factor of production fixed
Long run
All factors(land and labour) are variable
What happens to average cost and average variable costs curves when output increases? And why
Curves coverage because average fixed cost becomes less significant
What does the law of diminishing returns state
Total output increases at a decreasing rate
As additional units of the variable factor are added to a fixed factor of production, marginal product of variable factor falls
Marginal product?
Marginal product increases so the total product increases at an increasing rate
Marginal cost calculation
Change in total cost / change in output
Economies of scale
Exist when a firm experience a fall in unit cost with an increase in output
Diseconomies of scale occur when ?
A firm experiences an increase in unit cost with a decrease in output
Increasing returns to scales
Where a % increase in input brings a greater % increase in output
Decreasing return of scales
Where a % increase in input brings about a smaller % increase in input
Constant return of scales
%increase brings same % increase in output
Types of economies of scale
Technical
Purchasing
Managerial
Financial
Reasons for diseconomies of scale
Motivation
Communication
Coordination
Control
Two barriers of entry
Legal requirements
Costs of entering
Why is a monopolist allocatively inefficient
The price is greater than the marginal costs where it profit maximises
How does monopolistic competition differ from perfect competition
Price maker
Has barrier to entry
Long run abnormal profits
Porters five forces
Entry threat
Substitute threat
Buyer and supplier power
Rivalry-these forces affect profitability
How can firms influence the five forces
Can combine with other firms to pressurize
Can take over other firms to reduce rivalry
Can differentiate to reduce substitute threat
Why do monopolistic firms earn normal profits in the long run
If abnormal profits are made, more firms enter until normal profits are made, if a loss is made firms leave the industry
Feature of perfect competition
Products are homogeneous
When does a monopoly occur
When one firm dominates a market
Monopolist graph
Faces a downward sloping demand curve
Profit maximising monopolist produces when ?
Marginal revenue = marginal costs
Productively inefficient
It isn’t producing at the minimum of the average cost
Allocatively inefficient
It isn’t producing where price=marginal cost
Against monopoly
Welfare loss
Productive inefficiency
Allocative inefficiency
Lack of incentive
For monopoly
Encourages others to innovate
Prevent wasteful duplication
Barriers of entry
Legislation
Technology
The learning effect
Entry costs
Fear of retaliation
Price discrimination
Occurs when a firm offers the same product to different customers at different prices (nightclubs)
Markets can be separated in which ways
Time
Age
Region
Status
Income
What happens with price discrimination
Reduces consumer surplus and increases producer surplus
What happens with price discriminating
A higher price is charged where demand is more price elastic
What is perfect price discrimination
Consumer surplus is reduced to zero
Oligopoly
Occurs when a few firms dominate
What does an oligopoly create
Interdependence
Nash equilibrium
Occurs in a game with two or more players, in which each player is assumed to know the equilibrium strategies of the other players
