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define internal economies of scale

decrease in firm’s LRACOP when its output increases

list the factors that cause iEOS

1. increase productivitity

   1. specialised labour

   2. specialised machinery

   3. principle of increased dimensions

2. lower costs due to bulk discounts

3. spreading out of fixed costs in the long run

explain how increased factor productivity leads to iEOS

• As a firm expands, there is room for increased specialisation of labour and capital

• more efficient organisation of the production process

• while increasing the scale of production drives up total costs

  • like hiring more workers, buying new machines etc.

• the concurrent rise in labour productivity enables total output to

rise by mtp to total costs.

• thus, unit cost is lower.

external EOS

firm is able to enjoy lower ACOP when the industry expands

list the factors that affect eEOS

1. outsourcing parts of production

2. concentration of firms from the same industry within a specific geogaphical area. (facilitates cooperation between firms)

how does iEOS increase?

rise in output is mtp to the rise in total cost

labours doing specific operations —> workers become highly skilled and efficient at their specialised tasks —> inc. productivity, output rise mtp than rise total costs —> fall in unit cost

using specialised machinery

principle of increased

technological disruption

tech innovation that significantly alters the way industries and mkts. like e-commerce, ai etc.

price competition

strategy where firm sells its good or service at a lower price than a similar good or service sold by other firms within the same industry

• eg: discounts

link to PED, QD, TR, rise in D in next time period,

profit maximising level is at?

MR = MC

fixed costs

costs that do not change with output and are incurred even when the store is closed – e.g. rental costs.

variable cost

costs that varies directly with output – e.g. labour and raw material

real vs imaginary product differentiation

real: differences in quality of service, product attributes, packaging etc.

imaginary: persuasive advertising (salience bias, celebrity endorsement)

• effective product differentiation is hard to replicate (kinda like brand identity)

shut down

short-run decision not to produce anything during a specific period of time

condition: shut down if TR cannot cover all variable costs (i.e. TR<TVC or P<AVC)

what to explain in firms diagram?

1. at profit maximising level (MC = MR), what is q and p

2. what happens to q and p when theres a shift in AC / AC + MC / demand?

3. what happens to the cost, profits, TC and TR?

Explain why some firms shut down in the short run

what determines shut down

• TR and TVC

• produce zero units (aka shut down) if TR < TVC

• produce q’ units (MR = MC’) if TR > TVC

if TR cannot cover TVC, it should shutdown to only incur FC. If the firm chooses to continue production of Q’ units, it will incur both FC and VC, which is a worse outcome for the firm.

how would firms (regardless of mkt structure) determine price and output?

• describe the mkt (no of firms, bte etc.)

• produce at MR = MC and charge the highest price for that output (when it cuts DD)

• diagram: DD=AR, MR, MC, P, Q

for oligopoly and monopoly the MR and DD curves are steeper due to price inelastic demand (smaller no of subs)

what profits do monopolistic competition firms earn?

• normal profits in long run

• If firm earns snp in the short run, new firms will enter in a bid to earn some snp.

  • low bte: low start-up costs, easy to obtain shop license

• reduces market share

  • leftward shift of the DD curve, also becomes more price elastic (more substitutes now)

• New firms keep entering until each firm in the market earns only normal profits

  • LRAC tangent to D

for monopolies: if they earn snp in sr, they continue to earn snp in lr due to high bte