year 13 economics theme 3 Flashcards
business growth, business objectives, revenues costs profits, economies and diseconomies of scale, efficiency, basic market structures, perfect competition, oligopoly
profit maximisation
Goal of a firm to make the highest profits possible. MC=MR.
revenue maximisation
Goal of a firm to get the highest possible amount of money in. MR=0.
Sales
Maximisation
Goal of a firm to sell as many units as possible. AC=AR.
Satisficing
Goal of a firm to balance a range of different objectives.
total revenue
The total revenue earned from all the output a firm sells. TR= P x Q.
average revenue
Revenue per unit sold. AR = TR / Q (which must also = P).
marginal revenue
The additional revenue a firm makes when it sells one more unit of the
product. △TR / △Q
fixed costs
Costs that do not change (vary) with the output of the firm.
variable costs
Cost that change (vary) with the output of the firm. If you make greater
quantities you have to pay more of these costs.
total costs
The total cost of all the output (quantity) produced by a firm.
TC = TFC + TVC
average costs
Cost per unit. The Total cost of production divided by the quantity the
firm produces: AC = TC / Q
marginal cost
The cost of the next unit produced or the additional unit produced. Delta
TC / Delta Q △TC / △Q
average variable cost
Variable cost per unit.
AVC = VC / Q
normal profit
The minimum level of profit needed for a company to cover its costs &
remain in the market.
TR=TC or AR=AC.
supernormal profit
When a firm makes more than it needs to stay in the market.
TR > TC.
loss
TC > TR
diminishing marginal product
As input increases, output initially increases. Over time the amount of additional output gained from from an additional worker/FofP will fall.
economies of scale
Increasing the scale of production leads to lower average costs per unit.
diseconomies of scale
Increasing the scale of production leads to higher average costs per unit.
This is when large firms become inefficient.
minimum efficient scale
The lowest point on the long run average cost curve.
efficiency
How well or productively a firm or organisation uses inputs. The more
efficient you are, the cheaper it is to produce a particular quantity of
goods.
productive efficiency
When firms produce at the lowest possible cost. This means
production will be at the lowest point on the Average Cost curve.
allocative efficiency
When the cost of producing the good is well matched to how much a
consumer is willing to pay for it. We find this when MC=P.
x-efficiency
X Inefficiency occurs when a firm lacks the incentive to control costs.
This causes the average cost of production to be higher than
necessary.
dynamic efficiency
The optimal rate of innovation and investment to improve production
processes to reduce average cost.
perfect competition
Many firms producing the same product. All firms are price takers
and there are no barriers to entry. In LR, there are no supernormal
profits
monopolistic competition
Many firms, producing similar but differentiated products. Low
barriers to entry. Supernormal profits in the SR, but firms lose market
share and demand when new firms enter market. Normal profits in
LR.
monopoly
A single seller, or when one firm is the whole market. Price maker.
High barriers to entry. Will make supernormal profits in long and
short run. Inefficient production and a deadweight loss to Society is
likely.
monopsony
a single buyer in the market
oligopoly
A market with a small number of interdependent firms with
significant market share. Supernormal profits, strategic behaviour
and collusion are likely.
interdependence
The behaviour of firms will influence each other – oligopoly.
Natural Monopoly
A market where it is only possible for one firm to serve all consumers
and make a normal profit. A market with extremely high fixed costs
to establish a national network (railroads, telecoms, water supply).
homoegenous products
Goods sold by firms in the market are identical. All the firms are
perfect substitutes for each other.
price takers
Each firm has a tiny market share and they cannot influence the
market price of the good that they sell.
no barriers to entry
Firms can enter and leave the market very easily in response to the opportunity to make more profits or the potential for losses.
perfect information
All buyer and sellers have all the information and knowledge available about the goods available and the different firms.
no transaction costs
There are no additional costs of buying and selling goods in this
market.
no externalities
There are no third party costs or benefits to consuming goods in a perfectly competitive market.
