- Created by: Owen Graham
- Created on: 24-04-14 19:26
Firms and production costs
• Its assumed firms profit maximise but in the real world may try to maximise growth, sales revenue or managerial objectives (when there's divorce of ownership). Firms may satisfice and accept satisfactory profits and easy life rather than maximum profits.
• Firms convert FOP’s to output, due to divorce of ownership decisions about how much, what and who to produce goods and services for is taken by both managers and owners.
• The short run is time in which at least one FOP is fixed and long run is when all FOP’s are variable.
• Initially as new workers are employed they can specialise and so marginal product of labour rises but eventually it’ll fall as one worker adds less to total output than previous worker this is known as diminishing returns which only occurs in the short run. In the long run increasing and decreasing returns to scale occur.
• In the short run a firm has fixed costs of things like capital and variable costs of things like labour. The marginal cost is the cost to produce one more unit of output. It curves downwards as firms benefit from falling costs but then upwards again steeply as diminishing returns occur.
• The firm also has long run costs, these can be shown by long run average cost curve as output rises the firm benefits from increasing returns to scale so LRAC falls. Short run average costs curves can be shown on the LRAC to shown different levels of output, the SRAC curve at lowest point on LRAC shows productively efficient.
Market structures and sales revenue
• Perfect competition- large numbers of buyers and sellers with perfect information, able to buy and sell as much as they wish at market ruling price but unable to influence price(price-takers), homogenous product and no barriers of entry or exit.
• Monopolistic competition- imperfect competition among many producing slightly different goods.
• Oligopoly- a few interdependent firms that need to take account of rivals reactions when making decisions.
• Duopoly- 2 firms
• Monopoly- one firm who set price in market
• A perfectly competitive firm faces a horizontal revenue(AR/MR/D) curve as the firm can sell whatever at ruling market price but can't alter price. The ruling price is determined by entire supply and demand in the market. The firm wont want to change price as increasing all sales are lost to homogenous competitors and lowering price wont affect quantity sold as they can sell as much as they want at market ruling price.
• Monopolies face a downward sloping demand curve with elasticity determined by demand for product. The MR curve is always twice as steep as AR curve, with AR above. Monopolies will try to profit maximise(total profit=total revenue-total cost) so produce at MR=MC as this is point when total sales revenue = total cost to produce good. When MR is greater than MC…