The Firm: Objectives, Costs And Revenues Flashcards
What is the explanation of a short-term cost curve?
- lowering ATC= inc marg. returns
- constant ATC= productive efficiency
- increasing ATC= dim marg. returns
Marginal returns effected by MC= cost of 1 extra unit of labour effects total
What does the long-run cost curve look like?
- Y axis= avg cost
- X axis= output
- U shaped LRAC
- multiple smaller SRTC along LRAC
What is the explanation of the LRAC graph?
- decreasing RTS LRAC= economies of scale
- constant RTS LRAC= productive efficiency
- increasing RTS LRAC= diseconomies of scale
What is the MES in the long-run?
- starting point of constant LRAC
- point where LRAC is minimised
- a firm should produce on MES to benefit from lowest AC
How does the amount at MES effect the number of firms in the industry?
- small number of firms=high MES as less can produce at beneficial point as its so high
- high number of firms= low MES as more can produce at beneficial point as its lower
What are fixed costs?
Where one factor of production does not change with output in the SHORT RUN
E.g rent payment
What are variable costs?
Where at least one factor of production varies with output in the LONG RUN
E.g raw materials
How do you find the total revenue?
Price (Avg Rev) x quantity
What does a short-term costs graph look like?
- y axis= £
- x axis= output
- tick shaped MC curve, goes through constant ATC
- U shaped ATC curve
- downward/constant FC curve
- increasing/decreasing MARGINAL returns
How do you find the average revenue?
Marginal revenue?
Avg= total rev / quantity
Marg= difference in costs / difference in quantity
What are firms objectives?
1) assume profit max (MR=MC)
- higher dividends for shareholders
- research&development
2) max sales revenue (MR=0)
- dominate market, increase mon power
- may force rivals out industry
3) max growth
- economies of scale
- dominate industry
4) SATISFICING (satisfactory profits to make more in long run) shown by any price below prof max point
- may expand, new products
5) survival: especially in econ crisis
6) social community
7) building shareholder value
8) cost plus pricing= setting price against costs
What is divorce of ownership?
- shareholders own the firm, directors control the firm
- SH interested in dividends, D motivated by status
- conflicting objectives PRINCIPAL AGENT PROBLEM
- solved by giving D shares of firm
What are some examples of economies of scale?
- technical= capital equipment
- purchasing= buying in bulk
- financial= bank more trust in larger firm
- managerial= training/specialists
- risk bearing= firm goes to a different market in case theirs fails
What are the long term costs?
- increasing returns to scale= more than proportionate increase in factor input to resulting output
- constant returns to scale= equal increase
- decreasing returns to scale= less than proportionate increase in factor input to resulting output
What are the different types of profit?
•normal= minimum level of profit needed to keep a company competitive
- difference between total revenue+total cost is 0
- where AR=ATC on a normal costs curve
•supernormal= profit in excess of normal profit
-occurs when AR>ATC
