efficiency Flashcards
(32 cards)
profit maximisation
MC = MR
reasons for profit maximisation
-re-investment back into business, new capital, R+D etc.
-dividends for stakeholders ( reward)
-lower costs and prices for consumers
-reward entrepreneurship
disadvantages of profit maximisation
-dont know MC and MR
-scrutiny, regulators may investigate due to low standards
- key stakeholders harmed
-other objectives more appropriate
profit satisficing
sacrificing profit to satisfy as many key stakeholders as possible
how profit maximisation affects people
lower case = benefits
upper case = harmful
-shareholders - higher dividends
-managers - bonuses/ higher incomes
-CONSUMERS - HIGHER PRICES AND BAD REP
-WORKERS - LOW WAGES DUE TO COST CUTTING - STRIKES
-GOVERNMENT - HIGH PRICES, LOW WAGES - MAYBE INVESTIGATE
-ENVIRONMENT - COSTS CUT, ENVIRONMENT HARMED, PROTESTS, DECREASE IN REP
revenue maximisation
MR = 0
why revenue maximisation
-EoS, Qr > Qp, greater growth, lower AC lower prices
-predatory pricing - firm undercuts rival on purpose in order to drive out competitors out the market
-principle agent problem - managers decide to rev max to please shareholders for their own benefit/ greater perks
sales maximisation
AC = AR
whgy sales max
-EoS
-limit pricing
-principle agent problem
-flood the market - consumers become aware and loyal to product
barrier to entry/ exit
any obstacle that prevents a new firm entering/ or leave a market
4 reasons for barriers to entry
Legal
Technical
Strategic
Brand loyalty
barriers to entry
legal
-patents(have sole ownership of a good created)
-licences (licence to operate in a market, expensive and limited)
-red tape (excessive paperwork)
-standards and regulations (products/ safety standards/ min wage hiring laws)
-insurance
barriers to entry
technical
-start-up costs
-sunk costs ( costs that cant be recovered when leaving a market - advertising)
-EoS (low AC, prices)
-natural monopoly
barriers to entry
strategic
-predatory pricing
-limit pricing ( firms price at break even/ normal profit to limit competition)
-heavy advertising
Barrie’s to exit
-under-valuation of assets
-redundancy costs (pay workers when shutting down)
-penalties for leaving contracts early
-sunk costs
Economic efficiency
-allocative efficiency
-productive efficiency
-X-efficiency
-dynamic efficiency
Allocative efficiency
Where resources follow consumer demand where society surplus and net social benefit is maximised
Productive efficiency
When a firm is operating at the lowest point on their AC curve
Full exploitation of economies of scale (Qp)
X efficiency
Minimising waste
Production on the AC curve
reasons for x inefficiency
-monopolies - monopolist lacks a competitive drive and complacency can creep in and x-inefficiency
but monopolists are profit maximisers but reducing x inefficiency is difficult, could mean reducing wages, take away perk
-public sector firms, not profit motivated, objective is to maximise social welfare so x inefficient and waste could be allowed
dynamic efficiency
re-investment of LR supernormal profit in the form of new/ upgraded capital, R+D etc.
occurs over time
static efficiency
allocative, productive, x efficiency occurs at one specific production point
allocative efficiency
where demand = supply maximising society surplus
P = MC = D = AR
allocative efficiency
consumer analysis
-resources follow consumer demand
-low prices meaning a maximisation of consumer surplus
-high choice
-high quality
