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The Objectives of Firms

In Economics, it is assumed that the main objective of firms is to maximise its profits. It does this when
Marginal Revenue equals Marginal Costs (MR=MC). Profit plays key roles in economics such as
rewarding entrepreneurs, allocating resources…

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Divorce of Ownership and Control

Divorce of ownership and control is where the people that own the business (the shareholders) are
not the same as the people that control the business (the board of directors).
Where there is a divorce of ownership and control it affect the conduct of the…

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In the long run, all factors of production are variable. How the output of a business responds to a
change in factor inputs is called returns to scale.
· Increasing returns to scale occur when the % change in output is greater than % change in
· Decreasing returns…

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Fixed costs are the overhead costs of a business. They are important in markets where the fixed
costs are high but the variable costs associated with making a small increase in output are relatively
Total fixed costs (TFC) remain constant as output increases
Average fixed cost (AFC) = total…

Page 5

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A change in variable costs
A rise in the variable costs of production leads to an upward shift both in marginal and average total
cost. The firm is not able to supply as much output at the same price. The effect is that of an inward
shift in the supply…

Page 6

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In the long run all costs are variable and the scale of production can change (no fixed inputs)
-Economies of scale are the cost advantages from expanding the scale of production in the long
run. The effect is to reduce average costs over a range of output.
-These lower costs…

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-Expensive (indivisible) capital inputs: Large-scale businesses can afford to invest in specialist
capital machinery.
-Specialization of the workforce: Larger firms can split the production processes into separate
tasks to boost productivity. Examples include the use of division of labour in the mass production
-The law of increased dimensions (also known…

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External economies of scale occur outside of a firm but within an industry.
Example include investment in a better transportation network servicing an industry will
resulting in a decrease in costs for a company working within that industry and the
development of research and development facilities in local universities that…

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Technological Change
Innovation is "making changes to something established"
Invention is the act of "coming upon or finding: discovery"
Product innovation is often associated with small, subtle changes to the characteristics and
performance of a product.
New markets and "synergy demand":
Product innovation creates new markets, especially when new technology…

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Cost reducing innovations cause an outward shift in market supply and provide the scope for
businesses to enjoy higher profit margins with a given level of demand. Process innovation should
also lead to a more efficient use of resources.
The diagram above uses cost and revenue curves to show the…





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