Market Power

Revenue

Payments firms recieve when they sell the goods & services

Total Revenue

The total earnings of a firm from the sale of its output

Total Revenue Formula

TR= P * Q

Marginal Revenue

Additional revenue of a firm arising from the sale of an additional output

marginal revenue formula

change in TR / change in Q

Average revenue

revenue per unit of output

average revenue formula

AR= TR/Q = P

Explicit Cost

payments made by a firm to outsiders to acquire resources for use in production

Implicit Costs

sarificed income arising from the use of selfowned resources by a firm

Economic Costs

sum of explicit and implicit costs

What is included in implicit costs?

Opportunity costs

Short Run

At least one FOP is fixed, all production takes place

Long run

The period within which all FOP are variable, no fixed cost, planning takes place

Total cost

Sum of implicit costs and explicit costs

Average total cost

total cost per unit of output

average total cost formula

ATC= TC/Q

marginal cost

change in cost arising from one additional unit of output

marginal cost formula

change in TC / change in Q

profit

TR-TC

normal profit

minimum amount of revenue required by a firm to keep running, TR = TC

abnormal profit

TR>TC

loss

TR<TC

profit maximisation

determining the level of output that the firm should produce to make profit as large as possible

law of diminishing returns

if you keep adding one variable input (like labor) to fixed resources (like machinery or land), the additional output produced will eventually start to decrease

economies of scale

occur when a firm's average cost per unit decreases as its production volume increases

what are the economies of scale?

• specialisation of labour

• technical economies of scale

• specialisation of management

• bulk buying of input (FOP)

• financial economies

• transport economies

• spreading of certain costs

specialisation of labour

marginal productivity improves through specialisation

technical economies of scale

economies arising from improved or greater use of tech

specialisation of management

breaking down business tasks into smaller, specific areas and assigning them to managers with specialized expertise

bulk buying of inputs

as firms increase the size of their production, they are able to purchase their supplies at a lower cost per unit

financial economies

larger firms with established reputations are able to borrow fund’s at lower interest rates than smaller firms

transport economies

larger delivery vehicles

spreading of certain costs

larger firms can spread their advertising or marketing expenditure over a larger number of units, thus reducing average cost per unit

internal economies of scale

advantages a firm gains internally by growing larger, reducing the cost per unit as production increases.

external economies of scale

when overall growth in the industry creates benefits by which all firms operating on the market will benefit

diseconomies of scale

any increases in long run average costs that come about when a firm alters all of its FOP in order to increase its scale of output

what are the diseconomies of scale?

• coordination and monitoring difficulties (control)

• communication problems

• alienation and loss of identity

• poor worker motivation

coordination and monitoring difficulties

As a firm expands, it becomes increasingly difficult for management to coordinate activities across different departments, branches, or countries

communication problems

As the chain of command lengthens, messages can become distorted or delayed while traveling between staff and management

alienation and loss of identity

the decline in worker motivation, morale, and connection to company goals as an organization becomes too large and bureaucratic

poor worker motivation

when workers feel like “a cog in the machine”