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Flashcards in Theory of the Firm Deck (24)
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1
Q

long-run average total cost graph and explanation

A
2
Q

What are the five different types of economies of scale?

A
  • managerial
  • commerical
  • financial
  • risk-taking
  • technical
3
Q

managerial economies of scale

A

specialisation to oversee work

4
Q

commerical economies of scale

A

when buy more of a product get better price

5
Q

financial economies of scale

A

larger companies can borrow money at lower interest

6
Q

risk-taking economies of scale

A

diversity of products = lower risk

7
Q

technical economies of scale

A

larger products use less packaging

8
Q

equation for accounting profit

A

Pi = TR - TC

profit = total revenue - total cost

9
Q

normal profit

A
  • 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
10
Q

economic profit

A

profit above level of normal profit

11
Q

if accounting proft < normal profit

A

lose money

12
Q

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

A
13
Q

diminishing marginal returns

A

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

14
Q

law of increasing costs

A

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

15
Q

Graph for average physical product and marginal physical product and explanation

A

initially specialization overcomes DMR then DMR takes over

when MPP above APP, APP goes up

when MPP below APP, APP goes down

16
Q

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

A

less

17
Q

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

A
  • 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
18
Q

Graph showing TP and TVC and explanation

A

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

19
Q

Diseconomies of scale factors

A

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)

20
Q

Graph connecting average/marginal revenue and total revenue and explanation

A
21
Q

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

A

produce quantity at which difference between TR and TC is greatest

22
Q

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

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

produce up to the level of output where MR = MC

  • perfectly competitive = 2 lines
  • imperfectly competitive = 3 lines
23
Q

Where is profit maximisation and why?

A

MC = MR

  • firm will continue to produce until marginal profit = 0
  • MP = MR - MC
  • where MC = MR, MP = 0
24
Q

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

A

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