1. Revenues
1.1. Ability to set prices
1.1.1. Characterized by the different numbers of firms operating in each market. Firms find competitiveness established by the supply and the demand.
1.1.2. Revenues under imperfect competition: Firms have the ability to set prices, because consumers have less ability to switch between firms.
1.1.2.1. The demand is relative inelastic, so any decrease in price will lead to an increase in total revenue
1.1.3. Revenues under perfect competition: Firms have no price setting ability, because of the amount of firms and the size of the market.
1.1.3.1. Firm must charge the price set by the market. The firm's demand curve is perfectly price elastic.
1.2. Type of revenues
1.2.1. Total Revenues: selling price multiplied by the total quantity sold
1.2.1.1. Tr = p x q
1.2.2. Average revenue: the revenue per unit, or the selling price
1.2.2.1. Ar = Tr / q P = Tr / q
1.2.3. Marginal revenue: revenue gained with each additional unit sold
1.2.3.1. Mr = ΔTr / Δq
2. Profit
2.1. Normal profit: total revenue is equal to the total economic cost
2.2. Abnormal profit: total revenue exceeds economic cost
2.3. Making economic profit
2.3.1. When the price is above the average total cost.
2.3.2. More revenue from selling its goods or services than it costs to produce them and any opportunity cost
2.4. Making zero economic profit
2.4.1. Price equals average total cost.
2.4.2. Firm is said to be making a normal profit or enough profit to cover production costs and the implicit costs of the business decision.
2.5. Making negative economic profit
2.5.1. Price is below minimum average total cost.
2.5.2. The firm didn't achieve the break even point
2.6. Shutdown decisions in the short run
2.6.1. The price falls below minimum average variable cost.
2.6.2. Firms can make an economic loss and continue to operate in the short run. Because the firm is at least making enough to cover the variable costs or production.
3. Goals of firms
3.1. Profit maximisation
3.1.1. Maximum profits mean that the owners or shareholders get the most back on their original investment.
3.1.1.1. Fund research and development
3.1.1.2. Extra incentive for workers
3.1.2. The difference between the total revenue and the total cost will give us the profit for the firm
3.1.3. When MR exceeds MC, then we can know that the firm's revenue is growing at a faster rate than its cost.
3.1.3.1. Profit maximising level of outputs: MC = MR
3.2. Revenue maximisation
3.2.1. Wanting to gain more sales and therefore gain more brand loyalty compared to its competitors.
3.2.2. Earn profits in the longer term when it has established a wider customer base.
3.2.3. Revenue highest point: PED = 1 Marginal revenue = 0
3.2.3.1. +MR = increasing TR
3.2.3.2. - MR = decreasing TR
3.3. Growth maximisation
3.3.1. Firms aim to dominate the market
3.3.2. Predatory piercing: Firms charging very low prices in order to gain more market share in the industry.
3.4. Profit satisficing
3.4.1. Satisficing behaviour: Being satisfied with a lower level of profits.
3.4.2. Principal agent problem: objectives of the owner and the ones of the manager being different
3.5. Corporate social responsability
3.5.1. Firms responsability to look after their local community and the environment.
3.5.1.1. Less cost-effective decisions based on their products
3.5.1.2. Considering the future wastefulness of their products.
4. Production
4.1. Key questions
4.1.1. Employ more labour? Buy more machines? Purchase a new factory, office or shop? Hire a new manager? Buy more land?
4.2. Shorts VS Long run
4.2.1. Short: Factors of production are being fixed
4.2.2. Long: Factors of production are variable
4.3. Diminishing marginal returns
4.3.1. It explains that increasing the factors of production will increase productivity and production. At a certain point, it will start to decrease because the productivity of the factors of production will be reduced.
4.3.2. Average product = (Total product / Units of variable input)
4.3.3. Marginal product = (ΔTotal product / ΔUnits of variable input)
4.4. Relationship between curves
4.4.1. The intersection between the average product and marginal product occurs at the average product's highest point. (Additional marginal productivity = Average productivity)
4.4.2. Worker will reduce the production after achieving the maximum point of productivity
4.4.3. ΔTP / ΔInputs = (Tp2 - Tp1)/(q2 - q1) = m
5. Costs of production
5.1. Implicit & Explicit costs
5.1.1. Implicit: Risks and sacrifices made by the person who starts a new business.
5.1.2. Explicit: Directly related to production and payments for the factors of production
5.2. Costs in the short run
5.2.1. Fixed costs: those that do not vary when output changes
5.2.2. Variable costs: those costs that do vary when output changes
5.2.3. Total cost = total variable cost + total fixed cost
5.2.4. If workers are not producing increasing amount of output the average and the marginal costs will raise
5.2.4.1. Average costs: The cost per unit of output
5.2.4.1.1. Ac = Tc / Q
5.2.4.2. Marginal costs: The additional cost per additional unit of output
5.2.4.2.1. Mc = ΔTc / ΔQ
5.3. Costs in the long run
5.3.1. There is no fixed costs neither fixed factors of production. Where we will face a long run average cost curve
5.3.2. As firms grow they are able to enjoy increasing returns to scale, meaning they can slowly reduce average production costs
5.3.3. Increasing returns to scale
5.3.3.1. Specialization and expertise: Managers and staff will gain experience in running the firm. This help firms to improve themselves
5.3.3.2. Improved efficiency: . Larger firms are able to work better with their suppliers and negotiate better deals, and are able to buy in bulk at much lower prices.
5.3.3.3. Marketing: Firms have built a significant customer base for themselves and will benefit from word-of-mouth about their goods or services. In addition, they will be able to afford larger advertising campaigns.
5.3.3.4. Indivisibilities: In some industries equipment and machinery needed is so large and expensive that only a large firm can afford it. So capital is indivisible.
5.3.4. Decreasing returns to scale
5.3.4.1. Coordination difficulties: Large distance between the executives and the lowest employees. That increases the difficulties of coordination between the workers of a same company.
5.3.4.2. Poor communication: Informal conversations in large firms are usually changed for formal meetings. These creates a poor communication for the problems and changes a firm is having.
6. The big picture
6.1. Market structure
6.1.1. 1. Perfect competition 2. Monopoly 3. Oligopoly 4. Monopolistic competition
6.2. Market ineficency
6.2.1. Government intervention, and the existence of costs or benefits external to the transaction between buyer and seller.