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Fixed Costs = costs that don't change with output.
Variable Costs = costs that change directly with output
TC = FC + VC
Occurs at the level of production where the LRAC first reaches its lowest point. All economies of scale are exhausted at the M.E.S
if an industry grows too rapidly, the industry may be forced upwards as wages and prices of raw materials are raised. This would shift the LRAC up. External diseconomies of scale occur when the growth of an industry leads to rising long-run average costs.
Total revenue = price x quantity
Average revenue = total revenue/quantity
Normal profit is that level of profit which is just sufficient to keep all factors of production in their present use.
Average Cost = Average Revenue
Supernormal profit is anything above normal profit.
Allocationof factors of production
Signal for market entry
Rewards entrepreneurs for bearing risk
Economic performance indicator
Market share or sales growth
Defines a market structure whose assumptions are extremely strong and unlikely to exists.
Many buyers and sellers, no one buyer or seller should be able to influence the market price.
No barriers to entry or exit
No economies of scale
Firm can operate with supernormal profits in the short term
Shut down conditions is where the price is less than the firms AVC.
Shut down condition when price is less than AC, firms should leave the industry. No more firms enter the market.
Lower prices due to high competition
Low barriers to entry
Lower total profits
Greater entrepreneurial activity
The difference between the price the consumer is prepared to pay and the market price.
The difference between the price at which a producer is prepared to supply and the market price.
Allocative efficiency exists where goods are producer in line with consumer preferences. Technically this occurs when P = MC
Productive efficiency occurs when at the lowest point on the AC curve.
X Efficiency occurs when a firm doesn't produce on its AC curve due to organisational slack (lack of competition). Refers to monopolies.
Occurs over time
Two elements, product innovation and process innovation
Supply side strategies are linked with attempts to promote more innovative behaviour.
Tax credits/capital investment allowances
Policies to encourage small business creation and entrepeneurship
Toughening up of competition policy to expose cartel behaviour.
Increased funding for research at unis
Market power motive, increase market share.
Objectives of managers
Economies of scale
internal Growth - expansion into new product areas or increased geographical coverage.
External Growth - mergers, Horizontal integration - same industry, same stage of production, Vertical Integration - same industry, different stage of production, Lateral merger - related but not identical, Conglomerate merger - unrelated business