Theory of the Firm Flashcards Preview

IB Economics Outside Flashcards > Theory of the Firm > Flashcards

Flashcards in Theory of the Firm Deck (24)
Loading flashcards...

long-run average total cost graph and explanation


What are the five different types of economies of scale?

  • managerial
  • commerical
  • financial
  • risk-taking
  • technical


managerial economies of scale

specialisation to oversee work


commerical economies of scale

when buy more of a product get better price


financial economies of scale

larger companies can borrow money at lower interest


risk-taking economies of scale

diversity of products = lower risk


technical economies of scale

larger products use less packaging


equation for accounting profit

Pi = TR - TC

profit = total revenue - total cost


normal profit

  • return you could make from opportunity costs of investing money
  • next best paying alternative return on money
  • amount of profit a business person must recieve to stay in market in long run


economic profit

profit above level of normal profit


if accounting proft < normal profit

lose money


Graph for average fixed cost, average variable cost, average total cost, marginal cost and explanation


diminishing marginal returns

in system with fixed and variable inputs each additional unit of variable input yields less and less output

firm's short run marginal cost curve will eventually increase


law of increasing costs

producing one more unit of output costs more and more variable units


Graph for average physical product and marginal physical product and explanation

initially specialization overcomes DMR then DMR takes over

when MPP above APP, APP goes up

when MPP below APP, APP goes down


in short run, profit maximising output --- than revenue maximising level of profit



How do the graphs of total production and average/marginal production align?

  • dotted line on the left indicates the point at which MP of new workers stops increases and begins o decline
  • dotted line on the right indicates the point at which TP begins to decrease because MP of labor is negative 


Graph showing TP and TVC and explanation

reflects DMR

beyond dotted line, TP increases at decreasing rate and TVC increases at an increasing rate because each worker adds less to firm's output


Diseconomies of scale factors

Communication inefficiencies: too large so not enough communication - can lead to processes being duplicated unnecessarily

Office politics: managers in large companies focus on achieving personal goals rather than promoting best interests of firm, may employ incompetent workers to make themselves look better

Increased regulation: larger firms more likely to be regulated by government agencies, may put anti-monopoly policies in place which add to costs of production (significant legal costs)


Graph connecting average/marginal revenue and total revenue and explanation


How to profit maximise using the total revenue/total cost approach?

produce quantity at which difference between TR and TC is greatest


How to profit maximise using the marginal revenue/marginal cost approach?

  • Graph for perfectly competitive firm?
  • Graph for imperfectly competitive firm?

produce up to the level of output where MR = MC

  • perfectly competitive = 2 lines
  • imperfectly competitive = 3 lines


Where is profit maximisation and why?


  • firm will continue to produce until marginal profit = 0
  • MP = MR - MC
  • where MC = MR, MP = 0


What is the difference between a break even point and a shut down point?

break-even = price at which business will make all normal profit, no economic profit shut-down = price at which loss is equal if you shut down or stay open