Studied by 31 people
formula for total revenue
price x quantity sold
what is marginal revenue
extra revenue a firm earns from the sale of one extra unit
what is average revenue
the average receipt per unit, calculated by total revenue divided by quantity sold
what is the AR curve
the firms demand curve as it is the price of the good
when is the AR curve horizontal
in markets where firms are price takers - perfectly elastic demand for the goods
when is the AR curve downward sloping
when firms are price setters
total cost
how much it costs to produce a given level of output
FC + VC = TC
fixed costs
indirect costs that do not vary with output and firms always have to pay.
e.g rent
variable costs
direct costs that change with output e.g costs of raw materials increases as output increases
average total cost formula
TC/ quantity produced
ATC= AVC+AFC
average fixed costs formula
FC/quantity
average variable costs formula
VC/quantity
marginal cost
how much it costs to produce one extra unit of output
change in TC/ change in quantity
internal economies of scale
occur when a firm becomes larger
examples of internal economies of scale
Really Fun Mums Try Making Pies
risk bearing
financial
managerial
technoligcal/ production
marketing
purchasing
marginal cost
cost of making the next one
marginal revenue
revenue from selling the next one
what does each example of internal EOS mean
risk bearing- 7/10 work
financial - negotiate low interest loans
marketing- promote the brand name
technological/ production - best machinery
managerial- best staff
purchasing - discount (buying in bulk)
external economies of scale
occur within an industry when it gets larger
examples of external EOS
better universities
road infrastructure
communication networks
highly skilled population
diseconomies of scale
when average costs rise
examples of diseconomies of scale
control - canāt monitor how productive workforce is
coordination and communication reducing
overused machinery
no value workers/ poor staff morale
profit
difference between total revenue and total cost
profit maximisation
occurs when marginal cost = marginal revenue
each extra unit produced gives no extra loss or revenue
normal profit
The minimum profit required to keep factors of production in the long run
when TR-TC
supernormal profit
the profit above normal profit
when TR > TC.
losses
a firm makes a loss when they fail to cover their total costs
market structures
identifies how a market is
concentration ratio
the percentage of market share taken up by the largest firms
sub-normal profit
profit which is less than normal
perfect competition
market structure where many firms offer a homogeneous product
features of perfect competition
many firms
freedom of entry and exit
all firms produce an identical product
all firms are price takers so demand curve is elastic
perfect information
why do firms want to grow
experience economies of scale
more revenue
larger profit
more market share
monopsony power
build up assets and cash
why do some firms stay small
constraints on growth
size of market
access to finance
owner regulation
what is the principal agent problem
separation of ownership and control in larger firms and this can cause issues as they have differing aims
what is the aim of a business owner
short run profit maximise
what are managers aims
maximise their own benefits
what are the two types of business growth
organic growth and integration
what is organic growth
firms grow by increasing output. e.g increased investment or longer working hours
what is vertical integration of firms
integration of firms in the same industry but at different stages in the production process
what is backwards integration
when the merger takes the firm back towards the supplier of a good
what is forward integration
when the firm is moving towards the eventual consumer of a good
what is horizontal intergration
where firms in the same industry at the same stage of production integrate.
what is profit maximisation
goal to make the most profit possible in the short run - can generate funds for investment and survive a slowdown
in order to profit maximise where do firms produce
where MC=MR
wha is revenue maximisation
producing the most of revenue - looks better for managers
what is sales maximisation
aim to maximise growth of company, gets the company well known and increases market share
short run
where at least one factor of production is fixed
long run
when all factors of production become variable
if a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit.
e.g costs fall initially as machinery is efficient but as production continues, efficiently falls as machinery is overused.
allocative efficiency
more concerned with the distribution and allocation of resources in society and achieved when resources and used to produce goods and services which consumers want.
occurs where price = marginal cost (MC)
productive efficiency
producing goods and services for the lowest cost so fewest resources are used to produce each product.
MC=AC
dynamic efficiency
achieved when resources are allocated efficiently over time - concerned with investment
what is perfect competition
when there is a high degree of competition - few industries fit this type of market structure e.g agriculture
long term perfect competition diagram
because there is freedom to entry this allows for more firms to enter, this causes supply to increase and therefore it will return to equilibrium over time
what shape is the demand curve for perfect competition and why
horizontal as they are price takers, this is also D=MR=AR
what shape is the demand curve for monopoly and why
There are 2 curves which are diagonally going downwards. One is the demand curve and the other is MR as they are price setters so they can reduce the MR for every extra unit.
short run profit minimisation for perfect competition (losses) diagram
operates where MC=MR
short run profit maximisation for perfect competition (supernormal profits)
operates where MC=MR
what is the outcome of perfect competition
Firms are price-takers
Firms will make normal profits which means consumers are getting the lowest place leading to greater equality in society (where AR=AC). If firms made supernormalĀ profits ā more firms would enter causing prices to fall
X efficiency
Competition between firms will act as a spur to increase efficiency. In perfect competition, this is likely to occur.
what are the problems of perfect competition
no dynamic efficiency as no supernormal profit is made in the LT so R and D is unlikely.
no economies of scale
with perfect knowledge there is no incentive to develop new tech as itāll be shared with other firms
products can get boring and not varied
monopolistic competition
market structure which combines elements of monopoly and competitive markets
pure monopoly
where only one produces exists in the industry - rarely exists
characteristics of a pure monopoly
lots of buyers, one seller
total control over prices
barriers to entry
higher prices
price setters
poor quality/lower output
homogenous products
monopoly short and long run profit maximisation
as there is barriers to entry, it is the same for both short and long term.
Note 
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