AQA Economics Unit 3

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The Firm: Objectives, Costs and Revenues
The Objectives of Firms:
Main aim is to maximise profits:
o If MR>MC produce increase profit
o If MR<MC don't produce decrease profit
Other objectives:
o Maximise sales revenue:
Firms often seek to increase their market share - even if it means less profit. This
could occur for various reasons:
Increased market share increases monopoly power and may enable the firm to
put up prices and make more profit in the long run
Managers prefer to work for bigger companies as it leads to greater prestige and
higher salaries
Increasing market share may force rivals out of business. E.g. supermarkets have
led to the demise of many local shops. Some firms may actually engage in
predatory pricing which involves making a loss to force a rival out of business
o Maximise growth of a business
o Maximise revenue:
May allow them to attain economies of scale or some form of monopoly power
o Maximise managerial objectives (significant when there is divorce of ownership from
o Describes the situation where a firm is run in such a way as to satisfy a key stakeholder
o One form of satisficing if where those in control of the company seek to make
sufficient profit to keep shareholders happy, by pursue their own objectives subject to
this constraint
o This is called divorce of ownership from control
Q1 = Profit maximisation (MR=MC)
Q2 = Revenue Maximisation (MR=0)
Q3 = Marginal cost pricing (P=MC) -
allocative efficiency
Q4 = Sales maximisation - maximum sales
whilst still making normal profit

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Divorce of Ownership from Control:
Refers to the situation where the owners of the firm are not involved and therefore cannot
control its conduct
Could be run in a way that doesn't maximise profits as those controlling it may have different
objectives from those who own it
There are 4 types of companies:
o Sole traders: own the company and run it on a day-to-day basis
o Partnership: own the company and run it on a day-to-day basis
o Private limited company: owned by shareholders…read more

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The Law of Diminishing Returns and Returns to Scale:
Short-run Production and the Law of Diminishing Returns:
A short-term law which states that as a variable factors of production is added to fixed factors,
eventually the marginal returns of the variable product will begin to fall
Short run:
o The time period in which at least one factor of production is fixed
If a small firm hires employees, the workers benefit from specialisation
o The marginal product of labour will increase
o Marginal product is…read more

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Long run:
o The time period in which no factors of production is fixed
Three possibilities:
o Increasing returns to scale
An increase in the scale of all factors of production causes a more than
proportionate increase in output
o Constant returns to scale
An increase in the scale of all factors of production causes an exactly
proportionate increase in output
o Decreasing returns to scale
An increase in the scale of all factors of production causes a less than
proportionate increase in output
Fixed…read more

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Shows how the firm's average total cost is derived by adding the AFC and the AVC
Shows the ATC curve without AFC and AVC
AC is U shaped showing that AC per unit of output fall then rise as output increases
AC must eventually rise as at high levels of output, any further spreading of fixed costs is
insufficient to offset the impact of diminishing returns upon variable costs
Long run average costs:
If, as the firm increases its size or scale of factors of…read more

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Minimum Efficiency Scale is sited at the point on the LRAC curve beyond which no more
economies of scale are possible
o No diseconomies of scale, so all firms beyond MES are equally productively efficient
Economies of Scale: falling long-run average costs as the size or scale of the firm increases
Internal economies of scale: result from the growth of the firm itself and are usually categorised into
technical, marketing, managerial, financial and risk-bearing economies.…read more

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Economies of disintegration:
o Vertically linked production processes can be provided more efficiently by independent
specialist firms
Diseconomies of Scale: rising long-run average costs as the size or scale of the firm increases
o Monitoring how productive each worker is in a modern corporation is both imperfect
and costly
o It is difficult to co-operate complicated production processes and they may break down
o Achieving flows of information in large businesses is expensive
o Workers in large firms may feel a sense…read more

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Applies to firms with some degree of monopoly power
Firm must reduce price in order
to sell an extra unit of good
MR from the sale of the extra
unit is less than the price it's
sold at
Competitive Markets
The Model of Perfect Competition:
1) Many buyers and many sellers
o 0% concentration
2) Homogenous products
o Each firm's produce is identical
3) Perfect information
o Each firm and consumer has perfect knowledge of market conditions
4) No entry or exit barriers
o Complete…read more

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Subnormal profits: is the loss a perfectly competitive firm makes when the ruling market price
lies below the firm's ATC curve but above AVC curve
If price is above P1, consumers will buy elsewhere
If price is below P1 supply will be infinite
If firms produce lower than Q1, MR>MC produce
If firms produce higher than Q1, MR<MC don't produce
Long run equilibrium in perfect competition:
In the short run, new firms cannot enter the market so incumbent firms (firms already in the
market) continue…read more

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A PPF diagram can also show productive and technical efficiency.
X-efficiency: occurs whenever, for the level of output it is producing, the firm incurs
unnecessary production costs.
o Due to organisational slack resulting from the absence of competitive pressure,
monopolies are always likely to be technically and productively inefficient.
o Any point on the ATC curve including productive efficiency point it is said to be
X-efficient.…read more



Do you not have unit 4 too that would be very helpfull!!


Do you have any for Unit would be extremely helpful !!! 


please make unit 4 notes :) your a star 


Unit 4 notes would be amazing please :')


pleeeeeeeeeeeeaaaassse make unit 4 XD your unit 3 is so good


please make unit 4 :)

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