Objectives of firms

Define marginal costs and marginal revenue

Marginal cost is the additional total cost incurred with the production of one more unit of output. Marginal revenue is the change in total revenue due to the sale of an additional unit of output

Define fixed factors and variable factors

Fixed factors are inputs that cannot be changed in quantity within the time period. The costs incurred from using them are fixed costs and they remain the same even when output varies. Variable factors are inputs that can be changed within the time period, the costs incurred from them are variable costs and they increase when output increases

Outline what the LRAC curve reflects

It reflects the least-cost combination of the factor inputs of each unit of output. This means that each point on the curve is the lowest possible unit for each level of output. The minimum efficient scale(MES) is the minimum scale of production firms must expand towards to reap all IEOS. Beyond MES, firms experience IDOS and AC increases as output increases.

Define IEOS

It is the unit cost reductions that accrue to a firm as a result of expanding their scale of production

Outline the explanation for marketing economies of IEOS, with an example

Due to the large scale of production, larger firms often buy their raw materials and components in bulk. As a significant buyer, they enjoy more cost advantages, lowering unit cost. Swissotel will enjoy cheaper unit costs on toiletries than a smaller hotel

Outline the explanation for financial economies

Large firms are often associated with more credibility and have less risk of loan defaults, as they have more avenues to raise funds. This gives banks more confidence to loan larger sums to them and at lower interest rates. Hence unit interest cost decreases

Define IDOS

It is the unit cost increments that accrue to a firm as a result of them over-expanding its scale of production

Outline the explanation for overspecialisation for IDOS

When output increases with increased overspecialisation and workers become more disengaged due to monotony of repetitive work, the productivity of workers decreases and the unit output decreases while wages remain the same, thus increasing unit cost of production

Outline the explanation for managerial diseconomies for IDOS

It is when managers become more specialised in their field of work, making communication channels more challenging and workers find it hard to understand their job scope, resulting in higher monitoring costs and lower productivity, assuming wages remains constant, unit cost of production will increase

Define external economies of scale and how the graph is different from that of internal economies of scale

It is defined as unit cost reductions which accrue to the firm as a result of the industry expanding, EEOS is represented by a downward shift in LRAC whereas IEOS is the section of LRAC before MES

Outline the economies of information explanation for EEOS

As industry grows and markets become saturated, more firms cooperate and share innovation and knowledge to gain an edge. Their better knowledge will minimise unnecessary wastage that can be channeled to more productive uses

Outline the economies of disintegration explanation for EEOS

When industry expands, firms will outsource their production processes to those that can do it at a lower cost, allowing them to concentrate on their cost business and lower their average cost of production

Define external diseconomies of scale and outline how it is different from internal diseconomies of scale

It is defined as unit cost increments which accrue to the firm as a result of the industry over-expanding, it is represented by an upward increase in LRAC while IDOS is represented by the area on LRAC that is beyond MES

Outline the strain on infrastructure explanation for EDOS

Many firms clustered within a geographical area will likely lead to infrastructure constraints, with more traffic and congestion, transport of goods are slower and productivity is lower while wages remain the same. Hence, unit cost of production increases

Outline the strain on resources explanation for EDOS

With the expansion of the industry, the demand for the same pool of resources will increase. To satisfy the higher demand and output, more skilled and unskilled labour and other FOPs are needed. Firms will hence bid with higher wages or factor inputs, driving up unit cost of production

State the marginalist principle

It states that when making a decision, firms will weigh the marginal benefit, which is the additional revenue earned from an additional unit of goods and the marginal cost, which is the additional costs of production

State the objectives of profit maximising firms

Profit maximising firms will produce up to quantity where marginal revenue=marginal costs

Outline the objectives of profit satisficing firms

Due to imperfect information of the maximum level of profits between the owner and the manager, the managers will aim for a minimum amount of profits that will satisfy the owners rather than aiming for profit maximisation

Outline the objectives of revenue maximising firms

Due to competition between firms, the manager will aim to maximise revenue rather than profits as the former will reflect better on their job performance. However, it may not be in favour of the owner as higher costs may be incurred in pursuit of more revenue and if costs outweighs the revenue, profits are erroded

Outline short run shut down conditions (AR>AVC)

A firm making losses in the short run will not need to shut down if it can cover at least their variable costs. In continuing production, it could still cover part of its fixed costs, which they will have to pay in full if they shut down anyway. Hence, they minimise loses by continuing to produce at output where MR=MC

Outline short run shut-down conditions (AVC>AR)

A firm making losses in the short run will need to shut down if it is unable to cover at least its variable costs. It will minimise loss by shutting down

Outline long run shut-down conditions

In the long-run, all costs are variable and total costs equates to variable cost. Hence, a firm should shut down if it is unable to charge a price to at least cover its average total costs and it continually makes subnormal profits