Firms and Decisions Flashcards
Allocative efficiency
Allocative efficiency is the situation in which society allocates resources to produce a combination of goods and services that maximizes its welfare.
Productive efficiency
Productive efficiency is achieved when all resources are fully and efficiently utilised.
Variable Costs
Variable costs refer to costs that varies with output, only incurred when productions starts.
Fixed costs
Fixed costs refer to cost that does not change with level of output, already incurred when production is zero.
Internal Economies of Scale
MRFTM
Managerial EOS
Risk-Bearing EOS
Financial EOS
Technical EOS
- Factor Indivisibility
- Law of Increased Dimensions (the “container principle”)
- Specialisation and Division of Labour
Marketing EOS
Internal Diseconomies of Scale
HL
High Cost of Monitoring and Management
Low Morale of Workers
External Economies of Scale
IC
Economies of Information
Economies of Concentration
- Availability of skilled labour
- Well-Developed Infrastructure
External Diseconomies of Scale
IS
Increased strain on Infrastructure
Shortage of Industry-specific Resources
Minimum Efficient Scale (MES)
It is the scale of production where the internal economies of scale have been fully exploited and corresponds to the lowest point on the long run average cost curve.
Characteristics of PC
- Large number of small firms relative to market size
- Its products are homogeneous
- Perfect knowledge
- No BTE
- Price taker
Characteristics of Monopoly
- Only one firm in the industry
- Unique product
- Imperfect knowledge
- High/Complete BTE
Characteristics of Monopolistic Competition
- A relatively large number of small firms
- Similar but differentiated ( Real physical, Imaginary, Conditions of sale)
- Imperfect knowledge
- Low BTE
- Price Setter (but limited ability cause mkt share small)
Characteristics of Oligopoly
- A few dominant firms relative to market size
- Can be homogeneous or differentiated
- Imperfect knowledge
- Huge BTE (Artificial-Statutory,strategic Barriers. Natural Barriers)
- Price Setter
Cartel
Cartel - a formal agreement among oligopoly firms to collude in order to reduce uncertainty arising from mutual interdependency between sellers in the oligopoly. In colluding, sellers agree to maximize joint or cartel’s profits.
Cartels act like a monopoly, joint profits are maximised at the profit-maximising output level where the cartel’s MC = MR. The cartel’s marginal cost curve is the horizontal sum of the individual members’ marginal cost curves while the cartel’s MR curve is derived from the industry demand.
Limit pricing
Limit pricing is to prevent the entry of potential competitors
