Unit 4

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  • Unit 4
    • Economics of specialisation
      • When we concentrate on a product or a task
      • Within a business, tasks, a country, a region
      • Division of labour is when production is split into separate tasks.
        • Can raise output per person, due to repetition of task, gain in productivity lower supply costs,which means low prices can be passed on to consumers
        • Repetition can be demotivating, less pride-quality falls, less punctual=more absenteeism, hard for people to find new jobs, lack variety
      • Money, is a medium of exchange, a store of value, a standard of deferred payment and a unit of account
    • Costs
      • Average costs, total cost per unit of output= total cost/output
      • Average fixed costs, total fixed costs per unit of output= TFC/Q
      • Average variable cost, total variable cost per unit of output= TVC/Q
      • Diminishing returns, addition of a variable factor to a fixed factor results in a fall in  marginal product
        • Short run, at least one factor is fixed, as more units of variable input are added to fixed amounts of land and capital the change in total output will first rise and then fall
      • Fixed cost, business expense that does not vary directly with the level of output
      • Marginal cost, the change  in total costs from increasing output by one extra unit
      • Shifts in supply caused by, changes in unit costs of production, a fall in exchange rate, advances in production tech, new entrant producers, favourable weather conditions, taxes, subsidies and government regulations
    • Marginal, average and total revenue
      • Average revenue, revenue per unit or the demand curve
        • In a perfectly competitive market TR is a diagonal straight line passing through the origin, d+s determine price, average revenue is constant
      • Marginal revenue, the change in total revenue from selling one extra unit of output
      • Price-taking business, has to sell at the market price- found in perfect competition
      • Revenue maximization, an output when MR=0 PED IS 1
      • Revenue synergies, ability to sell more products and services or raise prices after a business merger e.g. cross selling into a new customer base
      • PED will vary along a straight line demand curve, high prices will have an elastic price response, demand is price inelastic towards the bottom of the curve
    • Profit
      • Abnormal profit, profit in excess of normal- supernormal or monopoly
      • Marginal profit, the increase in profit when one additional unit is sold if MR= £20 and MC=£14 MP= £6
      • Normal profit, is the transfer earnings of the entrepreneur i.e minimum reward to keep them in the industry
        • When its total revenue equals its total costs, an economic profit where profit = 0 if all costs are taken into accounts
          • In long term if not achieved it will close, if revenue is greater than  TVC it can continue to produce in the short-term
            • If TR is less than its TVC then it should close, worse off continuing
      • Profit maximisation occurs when MC=MR
      • Profit per unit, is profit margin= AR-ATC
        • Sub-normal, profit = less than normal (price per unit< average cost)
        • Super-normal profit = profit achieved in excess of normal profit (price>AC) creates incentive for other producers to enter the market
          • Total revenue is greater than total costs
      • Importance of profit- finance for capital investments and research, market entry, demand for and flow of factor resources, signals health of the economy
      • Untitled
    • Technological change
      • Disruptive change, pure-play e-commerce, B2C and B2B, dynamic pricing model, mass customisation, first-mover advantage
        • E-commerce has impacted revenues, quantity, distribution, profits, number of substitutes, barriers
        • How firms fight back- brand loyalty, physical store network, the option of omni channeling
      • Barriers to entry- YES= widespread availability, global e-commerce platforms made it easier for small firms to access their target base        NO= investments are heavy, existing players already have resources to survive, too much power


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