Firms

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  • Created by: Ellie
  • Created on: 26-05-15 10:53
What are the 7 objectives of firms?
Profit maximisation, Revenue maximisation, market dominance, growth maximisation, profit satisficing, welfare maximisation, long term sirvival
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When does profit maximisation occur?
When MC = MR
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When should a firm produce?
If variable costs can be covered in the short run and total costs can be covered in the long run.
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What is profit satisficing?
This is achieving a satisfactory objective to all the stakeholders (managers, workers, shareholders)
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When does revenue maximisation occur?
When MR = 0 and when the PED is 1
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What is the principle agent problem?
It recognises that the shareholders have a different objective from that of the managers
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What is the law of diminishing returns?
A short run law - as a variable factor of production is added to fixed factors eventually the marginal returns will begin to fall
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What is increasing returns?
The more of the variable factor is added total output rises at an increasing rate.
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What is diminishing returns?
When each additional variable factor is adding less to output than the one before it
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What are negative returns?
Adding more and more of the variable factor causes total out put to fall and marginal product to become negative.
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What are the assumptions of the law of diminishing returns?
State of technology remains constant and variable factors are homogenous
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What are fixed costs?
The costs of employing the fixed factors of production in the short run, they don't change when total product changes.
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What are Variable costs?
These vary with output and are the costs of employing the variable factors of production
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What are semi-variable costs?
Costs that contain a fixed and a variable cost e.g. a salary with bonuses
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What are total costs?
fixed costs+variable costs+ semi variable costs
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What are marginal costs?
The change in total costs arising form a unit change in output
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What are average costs?
Costs per unit of output = total costs/ output
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What is technological change?
Describes the overall process of invention, innovation, diffusion of technology or progress. It causes an outward shift in the PPF or LRAS
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How does technological change effect the market structure?
Reduce barriers to entry, ensure more competition, increased consumer choice, imperfect competition exists due to set up prices
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Define invention
Coming up with completly new ideas that can be patented
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Define Innovation
putting an invention to commercial use, it allows a firm to be dynamically efficient
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Define the minimum efficient scale
The lowest point on the long run average total cost curve where economies of scale have been exhausted
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How does the minimum efficient scale effect the market structure?
The higher the level of output where the MES kicks in the less room there is for efficient competition in the market it can act as a barrier to entry
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Define internal diseconomies of scale
The higher long run average production costs resulting from an increase in the size of the firm in the long run
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Define external economies of scale
The higher long run average costs resulting from the growth of the industry of which the firm is a part.
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What are examples of diseconomies of scale?
Price of input, coordination, communication, morale and control
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Explain each example of diseconomies of scale
Price of input (when you use up raw materials the become scarce so cost more), Coordination ( When there is loads of departments to organise), Communication ( It's harder to communicate in a big firm), Morale ( people get demotivated)
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Define internal economies of scale and give two examples
Mean lower long run average production costs resulting from an increase in the size or scale of the firm in the long run e.g. plant level and technical economies
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Define external economies of scale
Occur when unit costs of production fall because of the growth of the scale of the whole industry or market rather than the firm itself
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Define plant level economies of scale
Economies that occur at a single plant or factory
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Define technical economies of scale
When a large scale business can afford to invest in expensive equipment small competitors couldn't afford
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What are the different types of technical economies of scale?
Indivisibilities, the spreading of research and costs, volume economies, economies of massed resources, specialisation of labour, economies of vertically linked processses
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Explain indivisibilities
When a plant is indivisible there is a minimum size in which it can't efficiently operate
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Explain the spreading of research and costs
In large plants costs of r and d can be spread over a larger production run reducing costs in long run
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Explain volume economies
Often costs of capital increase less rapidly than capacity. Used in transporting industry
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Explain economies of massed resources
The operation of a large number of identical machines means less spare parts need to be saved
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Explain the specialisation of labour
A production line
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Explain economies of vertically linked process
Having a bigger plant means time, costs and energy can be saved in the movement of raw materials
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Describe managerial economies of scale
This can be achieved through increasing the size of a plant and or by grouping a large number of establishments under on emanager
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Describe firm level economies of scale
Economies of scale that occur at a firm level and not at an industry level
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What are examples of managerial economies of scale?
Improved communication, improved coordination, multiplant economies of scale (occur when long run average costs fall as a result of operating more than one plant)
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What are examples of firm level economies of scale?
Marketing economies, Risk bearing economies, Financial/ Capital raising economies
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Explain financial/capital raising economies
These relate to the bulk borrowing of funds required to finance business expansion. Large firms can borrow from banks at a lower rate
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Explain risk bearing economies
Large companies are less exposed to risks than smaller firms
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Explain marketing economies
You can either have bulk buying or bulk marketing economies. It is the lower unit cost of promotion that is enjoyed by a large firm
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What are examples of external economies of scale?
Economies of concentration, economies of information, economies of disintegration
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Explain economies of disintegration
Means that various diseconomies of scale have broken a production process into separate companies
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Explain economies of information
In large industries its beneficial to undertake research that would be available to other firms
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Explain economies of concentration
When a number of firms in the same industry are located close together they gain advantages through pooled labour and transport facilities
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Card 2

Front

When does profit maximisation occur?

Back

When MC = MR

Card 3

Front

When should a firm produce?

Back

Preview of the front of card 3

Card 4

Front

What is profit satisficing?

Back

Preview of the front of card 4

Card 5

Front

When does revenue maximisation occur?

Back

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