competition and market power

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firm
an organisation that brings together fop in order to produce output
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key decision for firms?
scale of their operations
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how do firms range?
complexity of organisation
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short run
the period over which a firm is free to vary its input of one fop (labour), but faces fixed inputs of the other fop
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long run
the period over which the firm is able to vary the inputs of all its fop
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how do you vary labour input?
overtime, hire more workers
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law of diminshing returns
a law stating that if a firm increases its inputs of one fop while holding inputs of the other factor fixed, eventually the firm will get diminishing marginal returns from the variable factor
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total cost
the sum of all costs that are incurred in producing a given level of output
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average cost
total cost/quantity produced; sometimes known as unit cost
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marginal cost
the cost of producing an additional unit of output
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total costs increase when?
firm increases its level of production
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fixed costs
costs that do not vary with the level of output
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variable costs
costs that vary with the level of ouput
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sunk costs
costs incurred by a firm that cannot be recovered if the firm ceases trading
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total costs formula?
TC=TFC+TVC
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why do total costs increase as the volume of production increases?
more of the variable input is needed to increase output
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common assumption in the short run of total costs?
at very low levels of output, TC will rise more slowly than output, but that as diminshing returns set in, TC will accelerate
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shape of SATC?
U-shape
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shape of SAFC? why?
slope downwards. fixed costs do not vary with the level of output , so as output increases, SAFC must alwyays get smaller, as the FC are spread over more units of output
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shape of SAVC?
U-shape
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where does SMC cut both SAVC and SATC?
minimum points
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what does the position of the cost curves depend on?
quantity of capital
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shape of LAC?
U-shape
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what happens as soon as the firm moves away from the output level for which capital stock is designed?
incurs higher average cost in the short run than is possible in the long run
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economies of scale
occur for a firm when an increase in the scale of production leads to production at lower LAC
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what enables a firm to produce more efficiently?
size of the firm
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EOS- volume
-technical -large ship can transport proportionally more than a small ship -large barrels hold more wine relative to the surface area of the barrell than small barrels -benefits of operating on a larger scale -indivisibilities
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-technical -cost of a factory is the same regardless of the amount of output -expenditure on r&d, viable only when a firm reaches a certain size -largest firm will always be able to produce at a lower AC than smaller firms
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natural monopoly
monopoly that arises in an industry in which there are such substantial EOS that only one firm is viable
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diseconomies of scale
occur for a firm when an increase in the scale of production leads to higher LAC
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EOS- management and marketing
-there is a range of volumes of output over which the management team does not need to grow as rapidly as the volume of the firm -cost of marketing a product may not rise as rapidly as the volume of production
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EOS- finance and procurement
-large firm may be able to raise finance for further expansion on more favourable terms -when buying in bulk, firms may be able to negotiate good deals -some of the firms suppliers may find it beneficial to locate in proximity to the firms factory
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internal economies of scale
eos that arise from the expansion of a firm
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external economies of scale
eos that arise from the expansion of the industry in which a firm is operating
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economies of scope
economies arising when ac falls as a firm increases output across a range of different products
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EOS- external economies of scale
-as the sector expands, a pool of skilled labour builds up -encourages people to acquire the skills needed, colleagues may find it viable to provide courses -reduces the amount that firms need to spend on training
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EOS- economies of scope
-arise because there are activities that can be shared across the product range
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constant returns to scale
found when LAC remains constant with an increase in output- in other words, when output and costs rise at the same rate
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minimum efficient scale
the level of output at which LAC stops falling as output increases
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when can diseconomies of scale (decreasing returns to scale) occur?
long run
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why is LAC this shape?
the firm faces eos at relatively low levels of output, when decreasing returns to scale set in, begins to slope upwards
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when could economies of scale occur over the whole range of output?
market where the FC are substantial, dominating the influence of VC
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total revenue
the revenue recieved by a firm from its sales of a good or service; it is the quantity sold x the price
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average revenue
the average revenue recieved by a firm per unit of output; it is total revenue/quantity sold
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marginal revenue
the additional revenue recieved by the firm if it sells an additional unit of output
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normal profit
the return needed for a firm to stay in a market in the long run
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profit formula
profits= TR-TC
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abnormal, supernormal or economic profits
profits above normal profits
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principle-agent problem
arises from conflict between the objectives of their principles and their agents, who take decisions on their behalf
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in the short run why may a firm chose to stay in a market?
covering its VC, better off remaining in the market and paying off part of the FC than exiting the market and losing all of its FC
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shut down price?
level of AVC, below which the firm will exit from the market in the short run
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how does a firm choose its ouput level if it wishes tp maximise profits?
profits will be maximised at MR=MC
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how to overcome principle-agent problem?
owners need to overcome the information problem by improving their monitoring of the managers' actions, or to provide the managers with an incentiv to take decisions that would align with the owners objectives
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why revenue maximisation?
in some firms managerial salaries are related to turnover rathr than profits
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where is total revenue maximised?
MR=0
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output being set even higher, to the point at which TR only just covers TC
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x-ineffiency
occurs when a firm is not operating at minimum cost, perhaps because of organisational slack
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satisficing
behaviour under which the managers of firms aim to produce satisfactory results for the firm rather than trying to maximise them
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corporate social responsibility
actions that a firm takes in order to demonstrate its commitment to behaving in the public interest
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why utility maximisation?
managers gain satisfaction e.g. from having a large team of people working for them
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with x-ineffiency where will the firm be operating?
above its LAC
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why assume profit maximisation?
use profit maximisation as the benchmark against which to compare other models of behaviour
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productive efficiency
when a firm operates at minimum AC, choosing an appropriate combination of inputs and producing the maximum output possible from those inputs
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3 stage procedure of decision process?
1. how much output, 2. appropriate combination of fop, 3. attempts to produce as much output as possible
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static efficiency
efficiency at a particular point in time
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allocative efficiency
achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences
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dynamic efficiency
a view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run
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Other cards in this set

Card 2

Front

key decision for firms?

Back

scale of their operations

Card 3

Front

how do firms range?

short run

long run