THEME 3

price x quantity sold

extra revenue a firm earns from the sale of one extra unit

the average receipt per unit, calculated by total revenue divided by quantity sold

the firms demand curve as it is the price of the good

in markets where firms are price takers - perfectly elastic demand for the goods

when firms are price setters

how much it costs to produce a given level of output

FC + VC = TC

indirect costs that do not vary with output and firms always have to pay.

e.g rent

direct costs that change with output e.g costs of raw materials increases as output increases

TC/ quantity produced

ATC= AVC+AFC

FC/quantity

VC/quantity

how much it costs to produce one extra unit of output

change in TC/ change in quantity

occur when a firm becomes larger

risk bearing

financial

managerial

technoligcal/ production

marketing

purchasing

cost of making the next one

revenue from selling the next one

risk bearing- 7/10 work

financial - negotiate low interest loans

marketing- promote the brand name

technological/ production - best machinery

managerial- best staff

purchasing - discount (buying in bulk)

occur within an industry when it gets larger

• better universities

• road infrastructure

• communication networks

• highly skilled population

when average costs rise

• control - can’t monitor how productive workforce is

• coordination and communication reducing

• overused machinery

• no value workers/ poor staff morale

difference between total revenue and total cost

occurs when marginal cost = marginal revenue

each extra unit produced gives no extra loss or revenue

The minimum profit required to keep factors of production in the long run

when TR-TC

the profit above normal profit

when TR > TC.

a firm makes a loss when they fail to cover their total costs

identifies how a market is

the percentage of market share taken up by the largest firms

profit which is less than normal

market structure where many firms offer a homogeneous product

• many firms

• freedom of entry and exit

• all firms produce an identical product

• all firms are price takers so demand curve is elastic

• perfect information

• experience economies of scale

• more revenue

• larger profit

• more market share

• monopsony power

• build up assets and cash

• constraints on growth

• size of market

• access to finance

• owner regulation

separation of ownership and control in larger firms and this can cause issues as they have differing aims

short run profit maximise

maximise their own benefits

organic growth and integration

firms grow by increasing output. e.g increased investment or longer working hours

integration of firms in the same industry but at different stages in the production process

when the merger takes the firm back towards the supplier of a good

when the firm is moving towards the eventual consumer of a good

where firms in the same industry at the same stage of production integrate.

goal to make the most profit possible in the short run - can generate funds for investment and survive a slowdown

where MC=MR

producing the most of revenue - looks better for managers

aim to maximise growth of company, gets the company well known and increases market share

where at least one factor of production is fixed

when all factors of production become variable

if a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit.

e.g costs fall initially as machinery is efficient but as production continues, efficiently falls as machinery is overused.

more concerned with the distribution and allocation of resources in society and achieved when resources and used to produce goods and services which consumers want.

occurs where price = marginal cost (MC)

producing goods and services for the lowest cost so fewest resources are used to produce each product.

MC=AC

achieved when resources are allocated efficiently over time - concerned with investment

when there is a high degree of competition - few industries fit this type of market structure e.g agriculture

because there is freedom to entry this allows for more firms to enter, this causes supply to increase and therefore it will return to equilibrium over time

horizontal as they are price takers, this is also D=MR=AR

There are 2 curves which are diagonally going downwards. One is the demand curve and the other is MR as they are price setters so they can reduce the MR for every extra unit.

operates where MC=MR

operates where MC=MR

• Firms are price-takers

• Firms will make normal profits which means consumers are getting the lowest place leading to greater equality in society (where AR=AC). If firms made supernormal profits – more firms would enter causing prices to fall

Competition between firms will act as a spur to increase efficiency. In perfect competition, this is likely to occur.

• no dynamic efficiency as no supernormal profit is made in the LT so R and D is unlikely.

• no economies of scale

• with perfect knowledge there is no incentive to develop new tech as it’ll be shared with other firms

• products can get boring and not varied

market structure which combines elements of monopoly and competitive markets

where only one produces exists in the industry - rarely exists

• lots of buyers, one seller

• total control over prices

• barriers to entry

• higher prices

• price setters

• poor quality/lower output

• homogenous products

as there is barriers to entry, it is the same for both short and long term.