Internal economies of scale Flashcards
What does internal economies of scale mean?
a firm’s average cost of production decreases the more output it produces
what happens to firms in imperfect competition?
Price-setters: Firms know they can influence the price of the good and know they can sell more by reducing price.
- this means highest cost firms have to exit market
what is marginal revenue?
the extra revenue the firm gian from selling an additional unit.
Lies under the demand curve, as firms needs to lower all its prices to sell one extra unit.
How much does a monopoly produce?
Whats the P here?
until MC = MR
P = c + 1/bn
What are monopoly’s profit?
(P - AC) * Q
How to calculate AC?
TC/Q
or
F*n/S + c
What happens to profit in the long run?
No profits - so P=AC
When P > AC, more firms will enter. When P < AC firms will exit the market, bc of losses.
What do the PP and CC curve mean?
PP: The more firms in market –> the more competition –> the lower the price is
CC: The more firms in market –> the less they each sell –> the higher the AC
What happens when the size of the market increases?
Firms produce more –> lower AC
CC shifts downwards.
What is intra-industry trade?
Two-way exchanges of similar goods
what happens high- and low cost firms when market size increase?
Low cost firms wins (increase f
profits and market shares)
High cost companies loser: contract and maybe exit.
When is a company considered multinational?
When is owns more than 10% of a foreign firm
Foreign Direct Investment (FDI)
When company buys more than 10% of foreign company (brownfield FDI), or when company builds a new production facility abroad (greenfield FDI).
Horizontal FDI
Expand your market by locating closely to a certain demand (costumers)
Vertical FDI
cheaper to locate production elsewhere = competitive advantage
- Cheaper for UK producers to produce parts of car abroad
