Microeco 2.3 Flashcards
(44 cards)
Profit formula:
Profit = Total revenue - Total cost
Where is Normal profit
Total revenue = Total cost - Just enough to stay in the market
When is there a loss
When total revenue is smaller than total cost
Where is supernormal profit
When total revenue is greater than total cost
Whilst MR is greater than MC, each sale ________ profit until __________ where additional profit = 0
Increases
MC = MR
How to find the profit maximising price
Up from MR = MC and across from AR
What affects whether a firm makes a profit to a loss
How greater AC is compared to AR
Why would a firm stay in the market if they are making a loss
In the short run, they will stay if price is greater than Average variable costs as they are making a profit with every unit sold
Where is the short run shutdown point
Where Price = AVC
Since all factors of production are variable in the long run, ATC = _____
In the long run ATC = AVC
Who are the influencers of the firm
Owners Shareholders Managers / directors Workers Consumers
Where is revenue max
MR = 0
Where is sales max
AR (Price) = AC
- Most sales possible without making a loss
What is profit satisficing
Making enough to keep shareholders happy / sufficient for investors to maintain confidence
Reasons why firms grow
- Make more sales and profit
- Increase market power
- Diversify and enjoy risk-brain Eos
- Interanal Eos
- Owner’s objectives
Reasons why firms don’t grow
- Firms don’t have finance to start up
- Regulation
- Niche markets
- Diseconomies of scale
- Some owners may prefer to profit-satisfice
What is the principal-agent problem
When the agent pursues different objective to the principal
Who is the principal
Shareholders
Who is the agent
CEO and directors
Example of principal agent problem
Agent wants to sales maximise to increase their own pay, rather than profit maximise for shareholders - Asymmetric information
Anthony Jenkins bonuses as Barclays owner
Types of firms
Owned by government, state
Owned privately
What is organic growth
When a firm reinvests in itself > Increase output
What is inorganic growth
Firms growing by merging or acquiring another company
Example of organic growth
E.g. Dominoes reinvesting money generated through selling its own shares
