Week 3 - Supply + Demand Flashcards
(53 cards)
What are economies of scale?
Cost advantages that a business obtains due to expansion
Factors of economies of scale
1) Factors that cause a producers ACPU to fall as production is increased
2) Portion on LRAC that is decreasing
3) Given by increasing returns to scale
What do economies of scale arise from?
1) Labour specialisation - increase workers = increase specialisations
2) Managerial specialisation - improving management structure
3) Efficient Capital - Most efficient machines + equipment
4) Bulk-buying products - greater buying power = discounted prices
Impact on ATC during constant returns to scale
ATC is constant as plant size increases
What are diseconomies of scale?
Occurs when a firm increases scale of output and LRAC increase
What is the force that causes larger firms to produce goods and services at increased per-unit costs
Diseconomies of Scale
What do diseconomies of scale arise from?
1) Duplication of effort - inevitable that someone’s takes on occupied project
2) Top heavy companies - more employees = larger% of management, reducing productivity
3) Inertia - Unwillingness to change
4) Cannibalisation - large firms often compete with others
5) Inelasticity of Supply - Heavily dependent on resource supply
What are the direct relationships between RTS and EOS?
1) Increasing returns to scale = economies of scale (falling ACP)
2) Decreasing returns to scale = diseconomies of scale (increasing ACP)
3) Constant returns to scale = neither economy/diseconomy (constant ACP)
What is the Minimum Efficient Scale (MES)?
Smallest level of output at which a firm can minimise LRAC
What is a natural monopoly?
Situation where unit costs are minimised by having a single firm produce the particular good/service (expect LRAC for EOS to be extensive and DOS rare)
What can we use a firm’s costs to derive
An individual’s firm supply function and market supply function
What is a competitive market?
Where there are many buyers + sellers - no buyer or seller has the power to materially affect the market price (we focus on this)
What is Supply?
The number of units of a good/service firms are willing and able to produce and sell during a period at a particular price
A firm should sell until
P = MC or MR = MC in a competitive market
What is marginal revenue (MR)?
The additional revenue gained for producing one more product
Equation for MR
Change in TR/ Change in Q
Economic profit (pi) equation including price
Pi = P x q - TC
Why is a competitive firm a price taker
Because they cannot affect market price
TVC can be expressed as
The sum of MC (assuming TFC = 0)
As prices increase, MR ___
Increases,, until P = MC for last unit produced
A firms supply curve is given by
It’s MC curve, curving upwards due to DMP
What is the Law of Supply
States there is a positive relationship between the price of goods and quantity of good supplied, with all else constant
Effects of Law of Supply state that if prices increase:
1) It is more profitable to divert resources to producing more
2) Relatively higher price will compensate for increase OC of producing more
3) We must keep producing as long as P/MR >= MC, additional units will lower profits
The supply of goods depends on
1) Price (P)
2) Price of other goods:
- Substitutes in supply (pss)
- Complements in supply (pcs)
3) Intermediate inputs (pi)
4) Prices of factors of production:
- Labour (w)
- Capital + Land (r)
- Technology (t)
5) Expected Future prices (pe)
6) Number of Suppliers (no)
