Additional unit of output produced by adding one more unit of factor input.
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Average product (AP)
Output produced per unit of factor input
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Technical economies of scale
Internal - Production line methods, specialised labour and equiptment, law of increased dimensions (If a boxes sides are double the length, it's capacity is 4 times larger)
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Purchasing economies of scale
Internal - Large firms need larger quantities and so can negotiate discounts.
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Managerial economies of scale
Internal - Specialist managers with more expertise and experiance usually leads to better decision making.
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Financial economies of scale
Internal - Borrow money at a lower rate of interest
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Risk-bearing economies of scale
Internal - Diversify into different product areas
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Marketing economies of scale
Internal - Usually a fixed cost. Benefit from brand awareness.
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Internal economies of scale
Involve changes within a firm
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External economies of scale
Involve changes outside a firm
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Examples of external economies of scale
Local colleges may start providing the qualifications needed by large local emplyers, reducing firms training costs.
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Diseconomies of scale examples
Wastage, communication is more difficult, mangers less able to control, difficult to coordinate activities between divisions/departments.
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How do LRAC and SRAC interact?
The minimum possible average cost at each output is shown by a long run average cost curve.
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External changes that affect LRAC
diseconomies of scale, external economies of scale, new technology, taxation
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What are returns to scale?
Returns to scale describe the effects of increasing the scale of production. In the long run firms can increase all factor inputs - returns to scale show effects on output of increasing all factor inputs by the same proportion.
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Profit
Total Revenue (TR) - Total Costs (TC)
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Total costs
Include all the money costs of things that have to be paid for as well as the opportunity cost of the things that aren't paid for.
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Normal profit
Occurs when TR=TC. Economic profit of 0. This means normal profit occurs when the extra revenue left, on top of what is needed to cover firms monetary costs, is equal to the opportunity costs of the factors of production that aren't paid for.
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Supernormal profit
TR>TC If a firms in an industry are making supernormal profit, this will create an incentive for other firms to enter that industry.
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Profit maximisation
MC=MR
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Revenue maximisation
MR=0. A frm with this approach will keep increasing output past the point of profit maximisation, as long as more output leads to greater revenue.
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Sales maximisation
AR=AC. Highest level of output a firm can sustain in the longrun.
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Alternative objectives
'not for profit', environmental objectives etc.
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Satisficing behaviour
Doing 'just enough' to satisfy stakeholders, instead of trying to maximise or minimise something.
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Barriers to entry
Any potential difficulty or expense a firm might face if it wants to enter a market.
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Market failure and government failure
Externalities, Imperfect information, Immobile factors of production, Public goods, Monopolies, Lack of equity, Unstable commodity markets
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Competition policy
Aims to increase competiotion and usually involves governments choosing to intervene in concerntrated markets.
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Privitisation evaluation
.
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Deregulation evaluation
.
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Internal market evaluation
.
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Monopolistic competiotion
.
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Oligopolies
.
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Price discrimination diagram
.
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Monopoly
.
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Perfect Competition
.
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Other cards in this set
Card 2
Front
Output produced per unit of factor input
Back
Average product (AP)
Card 3
Front
Internal - Production line methods, specialised labour and equiptment, law of increased dimensions (If a boxes sides are double the length, it's capacity is 4 times larger)
Back
Card 4
Front
Internal - Large firms need larger quantities and so can negotiate discounts.
Back
Card 5
Front
Internal - Specialist managers with more expertise and experiance usually leads to better decision making.
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