Y2 Production, costs and revenue Flashcards
Marginal product
The change in output from one more unit of an input (labour)
Average product
Output per units of input
Law of diminishing returns
Specialisation is exhausted, so marginal product begins to decrease and marginal cost begins to increase from additional input
Minimum efficient scale
The lowest level of output that’s needed to fully exploit EoS
Motives for profit maximizing
Higher dividends for shareholders
R&D
Less vulnerable to takeover
Higher salaries for workers
How to profit max
When MR=MC
Limitations to profit max
Difficult to know your MR and MC
Depends how other firms react
Demand is affected by other things than price
Profit satisficing
Profit satisficing
When workers/managers only do enough to keep the bosses content, as they won’t benefit much from higher profits
Why not profit max?
Market share focus
Survival in hard times
Breaking into new market
Invest for long-term prosperity
Why sales max
Increase market share
Monopoly power (more profit in LR)
Bigger company (more prestige & higher salaries)
Force rivals out of business
Social/environmental concerns
Ensuring not to harm environment
Improve brand image for more profit
Principal alone
Implications of MES
If low relative to market size, then easy entry and fierce competition
If high, then difficult entry and few firms
External diseconomies of scale examples
Increased rent
Congestion
Increased transport costs
Higher wages
Technological change
Overall process of invention, innovation and diffusion of technology. Occurs in very long run and should increase productivity, productive & dynamic efficiency. Also decrease MES and LRAC.
Paradox of progress
Some individuals lose (jobs lost, companies ruined) but overall more productive and wealthier society
Pros of privatisation
Incentives to be more efficient & achieve better economic welfare
Increased investment
Less X-efficiency
Cons of privatisation
Public sector monopoly can be replaced by private sector monopoly
Decreased investment & employment to cut costs
Often sold too cheaply
Nationalisation
When a government takes over a private company, so it’s wholly or majority state-owned
Pros of nationalisation
Coordinated approach, with the aim of bettering the country
Infrastructure can benefit everyone significantly
Can achieve considerable EoS
Cons of nationalisation
Many are managed ineffectively
Principal agent problem
Inefficiency due to no competition
