H2 Economics Firms & Decisions Pg1-61

Flashcards covering Objectives of Firms, Production and Costs, and Market Structures (Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly) based on Year 5 H2 Economics Lecture Notes.

According to the marginalist principle, at what output level does a rational firm maximize its short-run total profits?

A firm maximizes total profits at the output level where $MR = MC$ and $MC$ is rising.

In which scenario does a firm achieve revenue maximization?

Revenue maximization occurs at the output where no additional revenue can be reaped from selling an extra unit, meaning $MR = 0$.

How is 'economic cost' defined in the context of firm production?

$\text{Total Economic Cost} = \text{Explicit Cost} + \text{Implicit Cost}$.

What is the economic definition of the 'short run'?

The short run is a time period during which at least ONE factor of production is fixed, and output can only increase by using more variable factors.

What does the Law of Diminishing Marginal Returns (LDMR) state?

As more units of a variable factor are applied to a given quantity of a fixed factor, there comes a point where the additional output from each additional unit of the variable factor will eventually diminish.

How is the Average (Total) Cost (AC) calculated?

$AC = \frac{TC}{Q}$ or $AC = AFC + AVC$.

What is the mathematical relationship between Marginal Cost (MC) and Average Cost (AC) regarding the AC curve's shape?

When $MC < AC$, $AC$ must be falling; when $MC > AC$, $AC$ must be rising. The $MC$ curve intersects the $AC$ curve at its minimum point.

What is the 'Short Run Shut Down Condition' for a firm incurring subnormal profits?

A firm should shut down in the short run if total revenue is less than total variable costs ($TR < TVC$) or, equivalently, $AR < AVC$.

Define 'Increasing Returns to Scale' in long-run production.

Increasing returns to scale occur when output increases more than proportionately to the increase in inputs (e.g., doubling inputs leads to more than double the output).

What is the 'Minimum Efficient Scale' (MES)?

MES is the scale of production where internal economies of scale have been fully exploited, corresponding to the lowest point on the long run average cost ($LRAC$) curve.

Name the 'Technical Economy of Scale' related to the cubic law in shipping and warehousing.

The 'container principle' (or Law of Increased Dimensions), where doubling the dimensions of a container leads to a more than proportionate increase in its cubic capacity and lower average costs.

Which term describes cost savings occurring from producing a variety of products together using the same inputs?

Economies of Scope.

Why is a perfectly competitive (PC) firm considered a 'price-taker'?

Due to a large number of buyers and sellers, homogeneous products, and perfect knowledge, the firm cannot influence the market price and faces a horizontal demand curve where $P = AR = MR$.

What is the long-run equilibrium profit level for a firm in Monopolistic Competition (MPC)?

A firm in MPC makes only normal profits ($TR = TC$ or $AR = AC$) in the long run because low barriers to entry allow new firms to erode supernormal profits.

Define a 'natural monopoly' based on the lecture notes.

A natural monopoly arises when market demand is only large enough to support one firm operating at its minimum efficient scale, characterized by a continually falling $LRAC$ over the entire market demand.

What is 'mutual interdependence' in the context of an Oligopoly?

Also known as rival consciousness, it means every action taken by a dominant firm significantly affects its rivals' sales, triggering reactions that the original firm must consider when setting price or output.

What is a 'concentration ratio' used to measure?

The extent to which a few firms dominate a market or industry in terms of market share (e.g., the 3-firm, 4-firm, or 5-firm concentration ratio).

What is the profit-maximizing output condition for a formal cartel?

A cartel acts like a monopolist, maximizing joint profits where the industry's combined marginal revenue equals its combined marginal cost ($MR = MC$).

What are 'sunk costs' and why do they act as a barrier to exit/entry?

Sunk costs are costs that cannot be recovered once committed (e.g., industry-specific capital or advertising). They increase the risk of entry because they cannot be recouped if the investment fails.

What is the 'principal-agent problem' mentioned in the context of alternative firm objectives?

A conflict resulting from the separation of ownership (shareholders/principals) and control (managers/agents), where managers may prioritize 'managerial utility' (prestige or bonuses) over profit maximization.