Theme 3

Question 1

Total Revenue =

Answer 1

Price x Quantity

Question 2

Average Revenue =

Answer 2

Total Revenue / Quantity

Question 3

Marginal Revenue =

Answer 3

Change in Total Revenue / Change in Quantity

Question 4

Total Costs =

Answer 4

Fixed Costs + Variable costs

Question 5

Average Costs =

Answer 5

Total Costs / Quantity

Question 6

Marginal Costs =

Answer 6

Change in Total Costs / Change in Quantity

Question 7

Profit =

Answer 7

Total Revenue - Total Costs

Question 8

If profit equals 0, what is it?

Answer 8

Normal profit

Question 9

If profit is greater than 0, what is it?

Answer 9

Supernormal profit

Question 10

Marginal Productivity defintion

Answer 10

The amount produced by each additional worker. = Change in output / Change in workers

Question 11

If marginal productivity falls what will rise?

Answer 11

Marginal Costs

Question 12

Internal economies of scale examples:

Answer 12

Fun - Financial
Mums - Managerial
Try - Technical
Making - Marketing
P - Purchasing

Question 13

External economies of scale definition

Answer 13

Cost savings outside of a firm but within an industry i.e. better transportation networks

Question 14

Diseconomies of scale

Answer 14

Average cost of production increases as output increases

Question 15

Minimum efficient scale definition

Answer 15

Minimum level of output needed for a business to fully exploit economies of scale

Question 16

At what point is profit maximisation on a monoply diagram?

Answer 16

MR = MC

Question 17

At what point is revenue maximisation on a monoply diagram?

Answer 17

MR = 0

Question 18

At what point is sales maximisation on a monoply diagram?

Answer 18

ATC = AR

Question 19

At what point is satificing on a monoply diagram?

Answer 19

Sales max to price. Should form a triangle

Question 20

What is productive efficiency?

Answer 20

The lowest point of the average cost curve

Question 21

What is allocative efficiency?

Answer 21

When a firm produces at a point where economics welfare is maximised. (Supply meets demand)

Question 22

What is dynamic efficiency?

Answer 22

When a firm reinvests its profits to become more efficient

Question 23

What is being x-inefficient/efficient?

Answer 23

Costs being higher/lower than they should be

Question 24

When does a firm have static efficiency?

Answer 24

When it is allocatively and dynamically efficient

Question 25

Characteristics of a monoply (5)

Answer 25

Firm is the industry - the whole output is by the firm Barriers to entry No substitue goods Profit maximise Price maker

Question 26

Benfefits and drawbacks of a monoply to a consumer

Answer 26

- Benefits: Dynamically efficient-> economies of scale -> lower prices, Innovation -> more choice - Drawbacks: Not allocatively efficient, restrict output -> drive up price, productively inefficieny, x-inefficient

Question 27

Benefits and drawbacks of a monoply to firms

Answer 27

- Benefits: Exploit economies of scale -> lower costs, good for innovation, faster rate of tech development -> reduce costs -> better products - Drawbacks: X-inefficient -> high costs -> lower profits, productively inefficient

Question 28

Benefits and drawbacks of a monoply to workers

Answer 28

- Benefits: Job security - Drawbacks: Low wages (monopsony power), deskilling (structural unemployment)

Question 29

Benefits and drawbacks of a monopy to suppliers

Answer 29

- Benefits: Guranteed contracts to supply - Drawbacks: Lower prices offered due to monoply power (monopsony power)

Question 30

Price discrimination definition

Answer 30

When a firm with market power charges different prices for an identical product (i.e. age, time of day, geography)

Question 31

Conditions needed to price discriminate (3)

Answer 31

Market power No resale Segregate the market between consumers with different willingness to pay and with different price elasticity of demand

Question 32

What is cross-subsidisation?

Answer 32

Those who pay a higher price, subsidise those who pay a lower price (equitable)

Question 33

Price discrimination pros and cons

Answer 33

Pros: Profitable -> higher total revenue, larger output, cross subsidisation -> poorer customers, manages demand, reinvest profits -> long-term benefits of increased dynamic efficiency + lower prices Cons: Unfair, predatory pricing, decline in consumer surplus

Question 34

What is a natural monoply?

Answer 34

When competition would be inefficient as it would increas costs i.e. railways, water companies

Question 35

Characterisitics of a natural monoply

Answer 35

High capital cost to set up Duplication is unecessary and wasteful The MES does not occur until an extremely high level of output as the economies of scale do not dimmish in the forseable future

Question 36

Perfectly comeptitive market characteristics

Answer 36

Large number of buyers and sellers Produce homogeneous goods (all products the same) No one firm or individual buyer is large enough to affect market price Factors of production are perfectly mobile Customers and firms have perfect knowledge No barriers to exit or entry Examples: foreign exchange markets, agricultural markets, internet related markets

Question 37

What is the shutdown price and why may firms stay in the market if they make a loss?

Answer 37

AR (P) < AVC In case other firms leave