Business Economics
by james campbell

1. Profit maximisation
1.1. Normal profit: is that level of profit which is just sufficient to keep all factors of production in their present use. It occurs where AC = AR.
1.2. Supernormal profit is anything in the excess of normal profit.
1.3. Profits are maximised when MC = MR
1.4. Functions of profit are: allocation of factors of production, signal for market entry, promotes innovation, investment, rewards entrepreneurs risk, economic performance indicator.
1.5. Alternative goals: managerial status, market share, revenue maximisation
1.6. Principal agent problem in asymmetric information
1.7. Traditional view owners are managers, managerial view of divorce between ownership and control.
2. Perfect Competition
2.1. Assumptions: 1. Many buyers and sellers
2.2. 2. No barriers to entry or exit
2.3. 3. Identical products
2.4. 4. Perfect information
2.5. 5. No externalities
2.6. 6. No economies of scale
2.7. Sunk costs: are those costs that cannot be recovered e.g. highly specialised capital equipment
2.8. Shutdown condition: short run shutdown where P < AVC , long run shutdown where P < AC
2.9. The long run: is that period of time where all factors are variable implying that new firms are able to enter the industry.
2.10. Factors which firms compete in imperfect competition: brand, quality, delivery times, location, differentiation, innovation, range, customer service
2.11. Benefits of competition are: lower prices, low barriers to entry, lower total profits, economic efficiency
2.12. New node
3. Costs and revenues
3.1. Fixed costs: A fixed cost is one that does not change with output e.g. rent, taxes, loan payments
3.2. Variable costs: variable costs are ones that change with output e.g. component parts, workers
3.2.1. New node
3.3. Total costs = FC plus VC
3.4. Average cost = TC / Quantity
3.5. The short run: Is that period of time where at least one factor of production is fixed, usually capital.
3.6. The law of diminishing returns: states that as more of a variable factor is added to a fixed factor marginal product will initially rise owing to specialisation but marginal product will fall as diminishing returns set it.
3.7. Marginal product: is the addition to total product from the production of one extra unit of output.
3.8. Increased productivity, decreases cost per unit.
3.9. AC= AFC plus AVC
3.10. Average product is output per worker
3.11. Economies of scale: exist where an increase in all factors of production lead to a more than proportionate increase in output. There are technical and financial economies of scale.
3.12. Minimum efficient scale: is the point where the lowest average cost is first reached on the LRAC curve. It is the point where all economies of scale are exhausted.
3.13. TR = P times Q
3.13.1. AR = TR/Q
3.13.1.1. P= AR