Well's Questions Flashcards
What is market share?
Market share is usually defined as a firm’s share of sales as a percentage of the total market sales.
What is n firm concentration ratio?
The n firm concentration ratio is the percentage of market share of the largest n number of firms. A three firm concentration ratio of 80% means the largest three firms share 80% of the market.
What is the key factor between the relationship between marginal and average?
If marginal is below average, average falls and vice versa.
What is short run?
The period of time in which at least one factor of production is fixed. This fixed factor is usually assumed to be capital, even though it can be labour (long worker training periods)
What is long run?
The long run is the period of time in which all factors of production can be varied. This means that all costs are variable and the firm can change its scale of production.
What is the law of diminishing returns?
The law of diminishing returns states that as units of a variable factor are added to a given quantity of a fixed factor, the additional quantity of output produced from adding one unit of the variable factor will at first rise and then eventually fall. This is because the fixed factor becomes diluted amongst too many of the variable factor and therefore becomes less efficient.
What is productivity?
Productivity is effectively the average product. It is the quantity of output per unit input (factor).
What are costs?
Costs are business expenses that firms incur from the production process. In the short run some costs are fixed and must be paid even if no units are produced, but in the long run all costs are variable due to the fact that all factor inputs are variable. Costs can be evaluated in three ways: looking at marginal costs, average costs and total costs.
Give the four cost formulae
TC = FC+VC.
AC = TC/Q
AFC + AVC.
MC = dTC/dQ
List 7 economies of scale
Technical – dimensions
Technical – indivisibilities
Marketing – cost per unit advertising falls.
Financial – cheaper rates of borrowing
Bulk buying –agree deals on larger supplies
Managerial – managerial specialisation and lower managerial costs per worker
List 3 internal diseconomies of scale
Morale
Communication
Control
3 methods to remove diseconomies of scale?
Human resource management
Open jobs up to competition
Performance related pay
What is the MES?
The MES is the level of output at which costs per unit are minimised.
What are returns to scale – explain all three mathematically
Increasing returns to scale - %↑ inputs %↑ outputs
Constant returns to scale - %↑ inputs = %↑ outputs
Decreasing returns to scale - %↑ inputs > %↑ outputs
Distinguish between returns to scale and economies of scale
Returns to scale is a long run concept referring to increases in output from rises in all inputs.
Economies of scale are a long run concept referring to falls in cost as output rises.
Give 2 E e of s
Economies of agglomeration – firms move together to produce in one geographical area
Suppliers experiencing internal economies of scale
What is normal profit?
The level of profit required to keep all factors in their current line of production. Normal profit is achieved when total cost equals total revenue as total costs include the opportunity cost of the entrepreneur being in this industry. Thus if any profits are in excess of this, they are abnormal and are unexpected gains for the entrepreneur.
What is the difference between economic and accounting profit?
Economic profit includes the opportunity cost to all factors of being in their current line of production. Accountants do not like this.
What is abnormal profit?
Above normal profit
5 assumptions of perfect competition
There are many buyers and sellers in the market (infinite) The product is homogeneous There is freedom of entry and exit Firms always aim to maximise profits There is perfect information
Why is the firm a price taker?
Because there are so many firms in the industry, no one firm has sufficient market dominance to choose a price level – the price is determined by market forces of demand and supply. If a firm tries to set price above this he will get no sales as customers will move to a different supplier. Thus the firm must take the price set by the market forces and can provide any level of output at this price (hence perfectly elastic demand curve)
Why are only normal profits available in the long run?
Because if an industry is making supernormal profits, new firms will be attracted to these and will be able to enter the industry because of freedom of entry. Thus firms will enter (increasing industry supply and therefore price) until all supernormal profits are competed out of the industry. Conversely if losses are made, firms will leave until price falls to a level where only normal profits can be made.
3 advantages of perfect competition
Allocative efficiency
Productive efficiency
Lower prices and higher output than monopoly (assuming no economies of scale)
2 disadvantages of Perfect Competition
Lack of variety
No money for R&D
Why must monopolist accept price or output
Because the monopolist is the only firm producing the good, this implies that the industry demand curve is the firm’s demand curve. As industry demand is downward sloping, this implies that a monopoly’s demand curve is downward sloping. This means that the monopolist can either choose and price or output level to produce at, but must accept the other by which price / quantity it refers to on the demand curve.
6 barriers to entry
Patents Government legislation Research, development and technology Economies of scale Control over supplies Control over outlets
Monopoly and efficiency – how is it inefficient (productive and Allocative)
The monopolist will profit maximise and therefore produce at a price above marginal cost, leading to Allocative inefficiency. If price is above marginal cost, this means that consumers are overvaluing the cost of producing one more good. The monopolist will only be productively efficient by chance, and it is okay to assume that the monopolist is productively inefficient. Monopoly can lead to X-inefficiency because of complacency of his/her monopoly position.
How can the government intervene in a natural monopoly?
the government can force the monopolist to produce at the allocatively efficient point, and then the Government can subsidise the loss. The Government could introduce a price capping method, which would act as a form of competition
3 arguments for monopoly
Supernormal profits will be used to innovate and invest in R&D
Economies of scale
Lesser output may be good for society in the case of negative externalities
