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Matthew Mavin-Economics unit 3

A firm is a production unit. It transforms resources into goods and services
"Industry" is used to describe a collection of firms operating in the same production process

How do firms grow?
Firms can grow by expanding the scale of their operations and gaining market…

Page 2

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Matthew Mavin-Economics unit 3

Technical barriers
- Few large firms may dominate due to sixe
- They use existing expertise and economies of scale to ensure they operate at the
lowest possible average cost and new firms entering the market will find it
impossible to compete.

Niche-market business
If a…

Page 3

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Matthew Mavin-Economics unit 3

Why do some firms break up?
Some firms may grow too large and experience diseconomies of scale. As a result of the
growth of output, the business and managers may lost focus and control over day to day
management of the firm and therefore long-run average…

Page 4

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Matthew Mavin-Economics unit 3

Marginal costs always foes through the minimum point of the average variable cost and
average total cost curves
If MC > AC then AC must be rising
If AC > MC then AC must be falling
Only time when the AC is not falling or rising…

Page 5

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Matthew Mavin-Economics unit 3

Economies and diseconomies of scale
Economies of scale
Internal economies of scale
Internal economies of scale are falling long run average costs associated with an increase in
output for an individual firm

Types of economies of scale include:
Financial economies, banks more willing to lend as…

Page 6

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Matthew Mavin-Economics unit 3

Total revenue = price x quantity
Average revenue: how much people pay per unit (price) and also the demand curve
AR = Total Revenue/quantity
Marginal revenue
- Mr is the revenue associated with each additional unit sold. I.e. the change in total
revenue from selling…

Page 7

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Matthew Mavin-Economics unit 3

Pricing strategies
Predatory pricing
Pricing below costs to drive out other firms. In the short run firms make a loss but as other
firms leave the prices are raised to higher levels than would have been possible with
competition. This is anti-competitive practice and can lead…

Page 8

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Matthew Mavin-Economics unit 3

Perfect competition
Many firms
Homogenous goods (Exactly the same)
Perfect knowledge
No barriers to entry/exit
No price setting powers, price set by market

Short-run supernormal profits in perfect competition

Revenue/ S
Costs MC


Supernormal profits


Q Quantity Quantity

Profit maximising…

Page 9

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Matthew Mavin-Economics unit 3

Long-run equilibrium in perfect competition:




Q Quantity

Monopolistic competition
Many small firms
Similar goods
Imperfect knowledge about rival firms price and output decisions but firms can identify
when supernormal profits are being made
Low barriers to entry/exit
Can set…

Page 10

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Matthew Mavin-Economics unit 3

A few large firms
Goods with some similar characteristics but brand loyalty tends to be strong
Imperfect knowledge about rival firms price and output decisions
High barriers to entry/exit
Can price set but may decide to agree price-fixing deals with rivals to avoid price…


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