Micro 3.Govt-Failure, Costs, Profit and Revenue Flashcards
(19 cards)
Govt failure?
When the govt intervenes to correct a market failure, but actually worsens the allocation of resources
Causing a distortion in the price mechanism
Causes of govt failure?
Setting maximum and minimum prices
The law of unintended consequences
Information gaps
Admin costs
How do maximum and minimum prices cause govt failure?
MAXIMUM:
Causes prices to drop, reducing supply incentive (excess demand)
MINIMUM:
Causes prices to rise, rationing consumer demand (excess supply)
What is the law of unintended failure?
When the govt implements policies to benefit society, which ALWAYS result in some unintended consequences in the form of negative externalities.
How do info gaps cause govt failure?
They hinder the govt from quantifying external costs and setting appropriate taxes
How do admin costs cause govt failure?
When the govt imposes regulation, it incurs costs to fund the work of those enforcing these regulations.
Hence, the govt budget worsens and taxes must be increased (excess supply)
Fixed costs vs variable costs?
Fixed costs: Costs that DO NOT vary with output
Variable costs: Costs that vary with output
In the LONG RUN there are only variable costs, because all FoPs are subject to change
Total cost?
TC = TVC + TFC
Average cost types?
AFC = TFC / quantity
AVC = TVC / quantity
ATC = TC / Q (short run)
Graphs of average cost types and why?
AFC (negative exponential), as Q increases, TFC is spread across more units decreasing AFC
AVC (Quadratic), Specialization causes an initial increase in productivity, so AVC decreases, and then overcrowding causes production to fall, increasing AVC
LRAC (Much Larger quadratic)- When firms first expand, internal economies of scale are used to decrease LR costs as production rises
HOWEVER, when a firm expands too much, internal diseconomies of scale can arise, increasing LRAC
Internal economies of scale?
Cost advantages a firm can achieve by expanding its operations and output, stemming from its own internal decisions and processes.
6 Types of internal economies of scale and their uses?
Ryan’s
Mum
Flies
Past
The
Moon
(ACRONYM)
Purchasing- Expanded firms can bulk buy at low costs because retailers don’t want to risk losing big orders
Technical- Expanded firms can invest in specialist capital, increasing productivity and lowering LRAC
Managerial- Expanded firms can hire specialist staff, increasing productivity and lowering LRAC
Marketing- Expanded firms can spread marketing costs across many units, reducing LRAC
Financial- Banks are more willing to loan to expanded firms at lower interest rates, reducing LRAC.
Risk-Bearing- Expanded firms can diversify into many areas, so if one of their sectors fail it will be less costly, because their profit hasn’t been solely invested here.
What is an Internal diseconomy of scale?
The cost disadvantage a firm incurs if it expands too much
4 types of Internal diseconomies of scale and their effects?
Alienation- Too many employees will cause isolation, and hence a lack of motivation and less productivity
Bureaucracy- More Manages will be needed, increasing admin costs and LRAC
Communication- Staff will take more steps to communicate in large firms, causing a rise in wasted, unproductive time.
What is an external economy of scale?
Cost advantages that arise from factors outside of individual firms but within a specific industry or location, that has expanded.
Revenue definition and types?
The Total amount of money received from the sale of any given level of output
Total Rev = Price X Quantity sold
Average Rev = TR / Q
Marginal Rev = Change in TR / Change in Q
Revenue curves in IMPERFECT competition?
With price and quantity on the axes:
AR: A straight downward demand curve where D = AR
MR: A 2X more steep downward curve than AR
TR: Negative Quadratic
Revenue curves in perfect competition?
Market diagram with P and Q on axes:
AR=MR=D: Straight horizontal line (perfectly elastic demand)
Firm diagram with TR and Q on axes:
TR: upward sloping with a constant gradient
Profit?
Total Revenue – Total Cost
