THEME 3

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67 Terms

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formula for total revenue
price x quantity sold
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what is marginal revenue
extra revenue a firm earns from the sale of one extra unit
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what is average revenue
the average receipt per unit, calculated by total revenue divided by quantity sold
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what is the AR curve
the firms demand curve as it is the price of the good
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when is the AR curve horizontal
in markets where firms are price takers - perfectly elastic demand for the goods
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when is the AR curve downward sloping
when firms are price setters
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total cost
how much it costs to produce a given level of output

FC + VC = TC
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fixed costs
indirect costs that do not vary with output and firms always have to pay.

e.g rent
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variable costs
direct costs that change with output e.g costs of raw materials increases as output increases
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average total cost formula
TC/ quantity produced

ATC= AVC+AFC
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average fixed costs formula
FC/quantity
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average variable costs formula
VC/quantity
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marginal cost
how much it costs to produce one extra unit of output

change in TC/ change in quantity
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internal economies of scale
occur when a firm becomes larger
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examples of internal economies of scale

Really Fun Mums Try Making Pies
risk bearing

financial

managerial

technoligcal/ production

marketing

purchasing
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marginal cost
cost of making the next one
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marginal revenue
revenue from selling the next one
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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)
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external economies of scale
occur within an industry when it gets larger
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examples of external EOS
* better universities
* road infrastructure
* communication networks
* highly skilled population

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diseconomies of scale
when average costs rise
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examples of diseconomies of scale
* control - can’t monitor how productive workforce is
* coordination and communication reducing
* overused machinery
* no value workers/ poor staff morale
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profit
difference between total revenue and total cost
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profit maximisation
occurs when marginal cost = marginal revenue

each extra unit produced gives no extra loss or revenue
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normal profit
The minimum profit required to keep factors of production in the long run

when TR-TC
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supernormal profit
the profit above normal profit

when TR > TC.

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losses
a firm makes a loss when they fail to cover their total costs
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market structures
identifies how a market is
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concentration ratio
the percentage of market share taken up by the largest firms
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sub-normal profit
profit which is less than normal
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perfect competition
market structure where many firms offer a homogeneous product
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###
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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
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why do firms want to grow
* experience economies of scale
* more revenue
* larger profit
* more market share
* monopsony power
* build up assets and cash
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why do some firms stay small
* constraints on growth
* size of market
* access to finance
* owner regulation
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what is the principal agent problem
separation of ownership and control in larger firms and this can cause issues as they have differing aims
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what is the aim of a business owner
short run profit maximise
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what are managers aims
maximise their own benefits
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what are the two types of business growth
organic growth and integration
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what is organic growth
firms grow by increasing output. e.g increased investment or longer working hours
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what is vertical integration of firms
integration of firms in the same industry but at different stages in the production process
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what is backwards integration
when the merger takes the firm back towards the supplier of a good
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what is forward integration
when the firm is moving towards the eventual consumer of a good
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what is horizontal intergration
where firms in the same industry at the same stage of production integrate.
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what is profit maximisation
goal to make the most profit possible in the short run - can generate funds for investment and survive a slowdown
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in order to profit maximise where do firms produce
where MC=MR
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wha is revenue maximisation
producing the most of revenue - looks better for managers
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what is sales maximisation
aim to maximise growth of company, gets the company well known and increases market share
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short run
where at least one factor of production is fixed
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long run
when all factors of production become variable
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### **diminishing marginal productivity**
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.
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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)
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productive efficiency
producing goods and services for the lowest cost so fewest resources are used to produce each product.

MC=AC
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dynamic efficiency
achieved when resources are allocated efficiently over time - concerned with investment
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what is perfect competition
when there is a high degree of competition - few industries fit this type of market structure e.g agriculture
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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
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
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what shape is the demand curve for perfect competition and why
horizontal as they are price takers, this is also D=MR=AR
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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.
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short run profit minimisation for perfect competition (losses) diagram
operates where MC=MR
operates where MC=MR
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short run profit maximisation for perfect competition (supernormal profits)
operates where MC=MR
operates where MC=MR
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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 supernormal profits – more firms would enter causing prices to fall
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X efficiency
Competition between firms will act as a spur to increase efficiency. In perfect competition, this is likely to occur.
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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 it’ll be shared with other firms
* products can get boring and not varied
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monopolistic competition
market structure which combines elements of monopoly and competitive markets
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pure monopoly
where only one produces exists in the industry - rarely exists
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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
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monopoly short and long run profit maximisation
as there is barriers to entry, it is the same for both short and long term.
as there is barriers to entry, it is the same for both short and long term.