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Microeconomics by Mind Map: Microeconomics
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Microeconomics

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1. Costs & Revenues

Fixed and Variable Costs

Fixed Costs = costs that don't change with output.

Variable Costs = costs that change directly with output

TC = FC + VC

the SRAC Curve

New node

The Minimum Efficient Scale

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

External Economies and Diseconomies

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, average and marginal revenue

Total revenue = price x quantity

Average revenue = total revenue/quantity

2. Profit Maximisation

Maximising Profit

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.

New node

The role of Profit in an economy

Allocationof factors of production

Signal for market entry

Promotes innovation

investment

Rewards entrepreneurs for bearing risk

Economic performance indicator

Alternative goals

Managerial Status

Market share or sales growth

Revenue Maximisation

3. Perfect Competition

Perfect Competition

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

Identical products

Perfect information

no externalities

No economies of scale

The Short Run

Firm can operate with supernormal profits in the short term

Shut down conditions is where the price is less than the firms AVC.

The Long Run

Shut down condition when price is less than AC, firms should leave the industry. No more firms enter the market.

The benefits of competition

Lower prices due to high competition

Low barriers to entry

Lower total profits

Greater entrepreneurial activity

Economic efficiency

4. Efficiency, Consumer & Producer Surplus

Consumer and Producer Surplus

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, Productive & X efficiency

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.

Dynamic efficieny

Occurs over time

Two elements, product innovation and process innovation

Government Policy and dynamic efficiency

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

5. Concentrated Markets

Why do firms grow larger?

Market power motive, increase market share.

Objectives of managers

Profit motive

Economies of scale

Risk motive

How do firms grow larger

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

6. Price Discrimination

Intro

Conditions necessary

Types

Examples

Consequences

7. Monopoly

Intro

Barriers to Entry

Monopoly + efficency

Costs + benefits of monopoly