AQA Economics Unit 3

The Firm: Objectives, Costs and Revenues
The Objectives of Firms:
Main aim is to maximise profits:
o MR=MC
o If MR>MC produce increase profit
o If MR Other objectives:
o Maximise sales revenue:
Firms often seek to increase their market share - even if it means…

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…

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…

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…

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…

o 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…

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
Control:
o Monitoring how productive each worker is in a modern corporation is both imperfect
and costly…

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…

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…

o 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.…