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Microeconomics by Mind Map: Microeconomics

1. 1. Costs and Revenues

1.1. Fixed costs

1.1.1. Does not change with output

1.2. Variable costs

1.2.1. Changes with output

1.3. TC = FC + VC

1.4. Average cost = Total cost / Quantity

1.5. Fixed costs are diluted as production increases

1.6. The short run

1.6.1. At least one factors of production is fixed New firms will be unable to enter the market (Perfect competition)

1.7. Law of diminishing returns

1.7.1. When increasing amounts of a variable factor are added to a fixed factor, and the amount added to total product by each additional unit of variable factor eventually dereases e.g. when marginal product of labour starts to fall

1.8. Principle of diminishing returns

1.8.1. Marginal productivity of each worker falls as fixed factor bcome overloaded

1.9. Average product

1.9.1. Output per worker

1.10. Divison of labour

1.10.1. Leads to increasing returns to labour

1.11. Marginal product

1.11.1. Change in output from adding one extra unit of labour

1.12. If a certain factor input has high productivity, firms would either keep the same amount of such input or employ more of it

1.13. AC = AFC + AVC

1.14. Economies of scale

1.14.1. Cost advantages that a business obtains due to expansion

1.15. Technical economies of scale

1.15.1. Expensive and specialist capital machinery

1.15.2. Specialisation of the workforce Boosts productivity

1.15.3. Increased dimensions / container principle

1.16. Purchasing economies

1.16.1. Monopsony (buying) power

1.17. Financial economies of scale

1.17.1. Larger firms are more credit worthy

1.18. Administrative economies of scale

1.19. Internal EoS occur when LRAC fall as output rises

1.20. Constant returns to scale exist when LRAC are constant as output rises

1.21. Diseconomies of scale occur when LRAC rise as output increases

1.21.1. Control Principal-agent problem

1.21.2. Co-ordination Inefficient flows of information Cost of managing supply contracts

1.21.3. Co-operation Sense of alienation

1.22. Economies of scope

1.22.1. When ATC of production decreases as a result of increasing the number of different goods produced

1.23. High start-up costs could act as a barrier to entry

1.24. Minimum efficient scale

1.24.1. Occurs at that level of production where LRAC first reaches its lowest points. All economies of scale is exploited at MES

1.24.2. Constant returns to scale

1.24.3. Lowest feasable cost per unit in the long run

1.24.4. Depends on the nature of costs of production

1.24.5. Ratio of fixed to variable costs is high Plenty of scope for reducing unit cost

1.24.6. Limited scope for scale economies MES is a small % of market demand Competitive market

1.24.7. Natural monopoly LRAC continues to fall over a huge range of output

1.25. Internal economies and sieconomies of scale are due to changes in the firm's size

1.26. External economies of scale

1.26.1. Occurs when the growth of a whole industry leads to falling LRAC Cheaper raw materials Facilities, support services, skills and experience can be shared Banks and financial institutions with industry specific expertise Attract labour with specific skills

1.27. Average revenue to producer = Price to consumer

1.28. Total revenue = Price x Quantity

1.29. Average revenue = Total revenue / Quantity

1.30. Marginal revenue

1.30.1. Addition to total revenue from the sale of extra unit of output

2. 2. Profit maximisation

2.1. Expicit monetry costs

2.1.1. When a firm buys resources for the purposes of production

2.1.2. Attract these resources away from alternative uses

2.2. Implicit costs

2.2.1. When firms already own certain factors of production themsleves

2.2.2. Don't need to purchase them in a free market transfaction.

2.2.3. Does not appear in the firm's account

2.2.4. Entreprenur or shopowner might be more usefully employed elsewhere There is an opportunity cost

2.3. Economists seek to measure both the explicit and implicit costs of a firm

2.4. Normal profit

2.4.1. That level of profit which is just sufficient to keep all the factors of production in their present use

2.4.2. Break-even

2.5. Supernormal profit

2.5.1. Anything above / in addition to normal profit

2.6. Profits are maximised when MC = MR

2.7. Role of profit in the economy

2.7.1. Allocation of factors of production

2.7.2. Signal for market entry

2.7.3. Promotes innovation

2.7.4. Investment

2.7.5. Rewards entreprenueurs for bearing risk

2.7.6. Economic performance indicator

2.8. Firms may have alternative goals

2.8.1. Managerial theories Risk involved in the venture is pooled across a large number of investors in a p.l.c. Divorce between ownership and control Managers may seek to maximise variables other the profits Managerial status Market share or sales growth Revenue maximisation Implication: Profits won't be maximised because managers will not be focused on minimising costs

2.8.2. Behavioural theories Modern corporations are complex organisations Stakeholers Groups who have a vested interest in the activity of a business Coalition of goals Dominant group will aim to give greater emphasis to their own agenda

2.8.3. Social objective Social enterprise

2.9. Asymmetric information

2.9.1. Principal-agent problem Hire experts to assess the performance of agents Share ownership schemes and share options programmes Shareholders to exercise theri voting rights Maximise shareholder value Stock market can impose a discipline on managers

3. 3. Perfect Competition

3.1. Market structure whose assumptions are extremely strong and unlikely to exist in most real-world markets

3.2. Many buyers and sellers

3.3. No barriers to entry or exist

3.4. Sunk costs

3.4.1. A cost that cannot be recovered e.g. training of staff or a piece of highly specialised capital equipment

3.5. Identical products

3.6. Pefect information

3.7. No externalities

3.8. No economies of scale

3.9. The competitive process

3.9.1. Scarce resources Formation of prices via forces of demand and supply Profits or losses emerge

3.10. The shutdown condition

3.10.1. Short run P < AVC

3.10.2. Long run P < AC

3.11. Long run

3.11.1. When all factors are variable New firms are able to enter the industry

3.12. Competition

3.12.1. Drives inefficient firms out of the market

3.12.2. Pushes price downward

3.12.3. Ensures that consumer sovereignty prevails

3.12.4. Lower total profits

3.12.5. Low barries to entry

3.12.6. Greater entrepreneurial activity

3.12.7. Economic efficiency

3.13. Consumers have imperfect information

3.13.1. Influced by effects of persuasive marketing and advertising

3.13.2. Asymmetric information

3.13.3. Negative and positive externalities

3.14. Factors which firms compete (other than price) in imperfectly competitive markets

3.14.1. Brand

3.14.2. Quality

3.14.3. Price discrimnation

3.14.4. Product differentiation

4. 4. Efficiency

4.1. Consumer surplus

4.1.1. Difference between the price the consumer is preapred to pay adn the market price

4.2. Producer surplus

4.2.1. Difference between price which producer is prepared to supply and the market price

4.3. Static

4.3.1. Occurs at a given point in time Allocative Exists where goods are produced in line with consumer preferences Occurs when price = marginal cost, S = MC Productive Occurs at the lowest point of average cost curve X efficiency

4.4. Dynamic

4.4.1. Occurs over time Product innovation Firms are satisfied with sustaining innovations Disruptive innovations may upset the satus quo Process innovation Changes to the way in which production takes place Affects a firm's ... Outward shift in market supply Lead to more efficient use of resources Consumers can expect lower prices

4.4.2. Factors which are likley to lead to improvement in dynamic efficiency R&D Technological change Increased physical capital Increased human capital Education and training

4.4.3. Government policy Supply-side strategies = attempts to promote more innovative behaviour Tax credits / capital investment allowances Policies to encourage small business creation / entrepreneurship Toughening up competition policy - expose cartel behaviour Joint ventures to fund R&D Lower corporation tax Increased funding for universities Important developments Increasingly most innovations is done by smaller firms and by entrepreneurs Innovation is now a continuous process Innovation is not something left to chance Demand inovation is becoming more important

4.5. Efficiency under perfect competition

4.5.1. Allocative efficiency is achieved P=MC in both SR and LR Consumer and producer surplus are maximised

4.5.2. Productive efficiency is achieved Occurs when equlibrium output is supplied at minimum average cost Attained in the long run equlibrium for a competitve market

4.5.3. Dynamic efficiency Homogeneous product assunption of perfect competition Little scope for product innovation Perfect competition is not a good market structure for high level of R&D and resulting product and process innovation

4.5.4. In long run exhbitis optimal levels of economic efficiency Can be used as a yardstick in comparison with other market structures

4.5.5. All of the conditions of perfect competition must hold If not met, impefect competition Deadweight loss