Business Economics

Advanatges of specialisatuion

Disadvantages of specialisation

In the short run,

Some costs are fixed

In the long run,

all costs are variable

Marginal Cost MC means

The additional cots to produce one more unit of good

Lowest AC occurs when

MC=AC

When AC=MC, the firm

Has reached the point of productive efficiency

What dioes the law of diminishing returns explain?

It explains what happens if all costs stay fixed and only one variable increases. It applies only in the short run

The additional output, which is generated when the firm keeps all factors, apart for one, fixed is called

Marginal product

The firm can be adding up more of one factor, while keeping others fixed, since specialisation is possible, but then

The law of diminishing returns arises, and output begins to decline

The Law of Diminishing Returns

The Marginal returns curve is

Opposite to the MC curve

Economies of Scale

the cost advantages of production on a large scale

Internal Economies of Scale

Technical economies of scale, purchasing economies of scale, managerial economies of scale, financial economies of scale, risk-bearing economies of scale, marketing economies of scale

technical economies of scale

Purchasing economies of scale

Managerial economies of scale

Financial economies of scale

Risk-bearing economies of scale

Marketing economies of scale

External economies of scale include

External changes

Examples of external economies of scale

Diseconomies of scale

disadvantages of firms being large scale

Internal disadvantages of scale

External disadvantages of scale

What is the best generator of large economies of scale

High fixed costs

Example of high fixed cost, low variable cost industry, preserving large economies of scale

What is the rational reaction of other firms, when one firm starts experiencing the economies of scale in high fixed costs industries?

Replicate the path of the first firm, or exit the market

In the long run, a firm can move into new

Short Run Average Cost curves

The lowest points of SRAC curves are represented by

The LRAC curve entirely

The average costs curves of a firm

What way can a firm minimize the average costs of production

What way is the shape of the LRAC curve determined

By internal economies and diseconomies of scale

The precise influencers of the shape of LRAC curve

Why is it sometimes believed that the diseconomies of scale do not arise in the firm?

Because, as soon, as AC curve stops falling, the continuous technical economies of scale do not let it rise

Increasing returns to scale

Constant returns to scale

Decreasing returns to scale

Increasing returns to scale contribute to

Economies of scale

Decreasing returns to scale contribute to

Diseconomies of scale

Economies of scale - Increasing returns to scale; Flat - constant returns to scale; Diseconomies of scale - decreasing returns to scale

Minimum Efficient Scale of Production means

The lowest point of output, at which the lowest average cost is possible

MES might be the

Optimal level of production

What industries have large MES

Industries with high fixed costs

Why do industries with high fixed costs have large MES

Marginal revenue MR

Extra revenue, obtained via producing the final unit of good

Firms revenue determines how revenue relates to

The output

What is illustrated by the square

Total revenue

What type is price-taking firm’s AR curve look like

The perfectly elastic one

When the demand curve is perfectly elastic, then

AR=MR

What makes the TR grow proportionally

The constant AR

The price-making firm’s Demand curve is sloping, because

It needs to decrease the price to increase demand

When the firm is a price maker, with a downward sloping Demand(AR) curve, the profit is maximized at

PED=-1; at the middle of the graph

TR is at its maximum, when

MR=0

The AR slope downward, because

the firm is facing a downward sloping demand curve, because it needs to lower the price, in order to sell more output

The MR slopes downward, because

Lowering the price to sell more output reduces the revenue

Normal profit occurs when

TR=TC

Supernormal profit occurs when

TR>TC

What is the key reason for a firm to continue operating in the long run?

Making normal profit

A loos-making firm might not close immediately, because

Its average costs might not be as bad in comparison to revenue