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Diagram of Diminishing Returns
· After Q1 the MP of an
extra worker falls.
· After Q1, the MC of
producing more goods
In the Long Run all factors of production (both capital and labour) are variable.
A firm's long run cost curve (LRAC) is constructed by using the point of tangency
with its short run cost curves.
Economies of scale occur when average costs fall with increasing output. Therefore,
increasing production leads to increasing returns to scale and there is greater
efficiency.…read more

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A good example is an assembly line
with many different jobs.
2. Bulk buying: If you buy a large quantity then the average costs will be lower.
3. Technical. When a firm benefits from increased scale of production. For
example, a large machine (e.g. blast furnace / combine harvester) would be
inefficient for small-scale production; for higher rates of production, the firm
gains a better rate of return.
4. Financial economies.…read more

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· Total Revenue (TR): This is the total income a firm receives.
This will equal Price * Quantity
· Average Revenue (AR): TR / Q
· Marginal Revenue (MR) - The increase in revenue from selling an extra unit,
· Profit = Total revenue (TR) ­ Total Costs (TC) or (AR ­ AC)* Q
· Profit maximisation occurs when the difference between TR ­ TC is the
Profit maximisation will also occur at an output where MR = MC
· Normal Profit.…read more

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Social / Environmental concerns. A firm may incur extra expenses to choose
products which don't harm the environment or choose products not tested on
animals. This has actually proved quite a good marketing strategy, e.g. for firms
like the Body Shop. Not all production decisions are based on profit and sales.
1. Productive efficiency. Productive efficiency occurs when the economy is on
the PPF. It will also occur at the lowest point on the firms SRAC curve.
2. Allocative efficiency.…read more

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Diagram of Kinked Demand Curve
Limitations of this model
1. The model does not explain how prices were set in the first place
2. Price stability may be due to other factors
3. In the real world firms often do cut or increase price. E.g. if firms are
seeking to maximise market share they may cut prices anyway.
If prices are rigid and firms have little incentive to change prices they will concentrate
on non-price competition.…read more


Abbas M.M

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