unit 7 Flashcards
(52 cards)
what do isoprofit curves show (6)
Isoprofit curves show all combinations of price and quantity that give the firm the same profit.
the shape depends on average costs for the firm
Isoporifit curves are steep when price is high and flatter when price is close to marginal cost
The slope of the isoprofit curve is given by:
- (Price - MC)/Q
Isoprofit curve is the indifference curve and its slope represents the marginal rate of substitution in profit creation, between selling more and charging more
what is the moat
something that separates the firm from its competitors and defends it against new entrants to the market
what does a firms profit depend on (4)
- customer base
- product differentiation
- competition
- innovation: keeps cost lower than competitors
what costs do firms face
- wages
- tax and government regualtion e.g. NMW
- production costs
how to find total costs
Total cost = unit cost x quantity
how to calculate total revenue
Total revenue = price x quantity
how to calculate total profit
Profit = total revenue – total costs
what is demand
how much potential consumers are willing to pay.
why is calculating using isoprofit curves not a good measure
Managers do not use isoprofit curves they usually do trial and error until they find their most profit maximising outcome
what is a profit function
shows the profit you would achieve if you chose to produce quantity Q and set the highest price that would enable you to sell that quantity
what is outsourcing
other firms choosing to be specialist skills rather than employing directly.
why may large firms be more profitable than small ones
- output is produced at a lower cost
- economies of scale
what does increasing output mean
it means increasing all inputs of production: workers, raw materials, machines, energy usage, factory premises, distribution trucks, advertising and packaging
why can large firms produce at a lower cost
Economies of scale in production: large scale production uses fewer inputs per unit of output. Economies of scale occur if doubling the amount of every input more than double output
Cost advantage: fixed costs such as advertising have a smaller effect on the cost per unit when output is high. Larger firms can purchase inputs at a lower cost because they have more bargaining power.
the different economic of scale in production (3)
Increasing output more than proportionally then the technology is said to exhibit increasing returns to scale in production or economies of scale
Increases output less than proportionally then the technology exhibits decreasing return to scale in production or diseconomies of scale
Increase output proportional then the technology exhibits constant returns to scale in production
what is a firms cost function
how much the firm’s production costs varies with its output level
what are fixed costs
they are fixed no matter how much the firm produces.
what are total costs
The sum of all the costs a firm incurs to produce its total output.
what are variable costs
if the firm increases production it will need to increase all the variable inputs thus increasing variable costs
how can costs per unit fall
they can fall if more output is produced and if there is fixed costs that do not depend on the number of units - they remain constant
formula for total costs
total costs = fixed costs + (cost per car)(quantity)
how to find average costs
total cost / total output quantity
what does the average cost represent
average costs is the marginal cost plus a share of the fixed costs this means the AC is greater then the marginal cost.
what are marginal costs
Marginal cost is the additional cost of producing one more unit of output
The cost increase when output increases by one unit is called marginal costs
Marginal costs are not always constant. A producer may have to increase storage in order to produce more cars. This increases MC
