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Economics unit 3 notes:

Firms - business organisations where decisions are made. They are typically engaged in the
production of goods and services.

Profit ­ the excess of a firm's revenue over its costs. From an economics point of view, cost means
the opportunity cost of the factors of production…

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Both types of business have unlimited liability. This means that the owners are liable in full for all
the debts of the business, and the lenders can take personal possessions if the loan repayment is not
meet by the assets of the business.

On the other hand, companies have limited…

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5. Co-operatives ­ independent businesses may join together to gain the advantages of
bulk-buying while still retaining their independence. A good example is the UK grocery chain
SPAR. There are 2,600 stores and £2.6 billion in retail sales a year.
6. Monopoly power. Large firms may choose to allow smaller…

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2. Economies of scale. Expansion of output in the case of horizontal integration offers potential
for lower long run average costs from a wide range of sources (technical, managerial etc.)
3. Diversification. Conglomerate and lateral integration take firms into different product areas,
making them better able to withstand a slump…

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However, even if MC is falling total costs will still be rising as long as MC is positive. The basis of costs
in the short run rests on the law of diminishing returns. The shapes of the MC and AVC are based
on increasing returns and diminishing returns. The AC…

Page 6

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Revenue:

Total Revenue = Price × Quantity.

Average Revenue = Total Revenue
Quantity


Short run profit Maximisation:

The difference between revenue and cost is supernormal profit.

MR slopes twice as steeply as the AR curve.

The profit maximising level is where MC=MR. you take
the line up to the AR…

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Managerial theories of the firm:

Managerial theories are based on the assumption that managers control the company. Managers
may have their own agenda, and wish to pursue goals such as maximising their own prestige or even
simply enjoying an easy life. Sometimes perks and status are not tied directly to…

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Freedom of entry ensures the only normal profit will be made in the long run, as any short run
supernormal profits will attract new firms into the market and erode profits. As new firms enter, the
industry's supply curve shifts to the right, lowering the market price. If they are…

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Monopolistic competition:

Market characteristics:
1. There are heterogeneous products as there is not perfect knowledge.
2. They are price makers.
3. Their aim is to maximise profits.
4. Lots of small firms.
5. No barriers to entry

Differences in the products can lead to brand loyalty. A customer may be…

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Oligopoly:

A few firms dominate the market. They have high levels of market concentration.
Neo-Classical Theory assumes that barriers to entry are a function of the size of the firm.
Small firms don't have them, big firms do.

Some oligopolies produce identical products (e.g. metals) but most produce differentiated products…

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