BUSINESS ECONOMICS Question & Answers

3 reasons for diseconomies of scale - ANSWER: 1) problems with cooperation and morale 2) increased demand for factors of production - their price rises 3) the Law of Diminishing Returns 3 reasons for external economies of scale - ANSWER: 1) training 2) infrastructure 3) the growth of ancillary industries 7 types of economies of scale: - ANSWER: 1) the spreading of fixed costs over a larger output 2) technical economies - ratios of length/area/volume - invisibility of factors 3) division of labour/specialization 4) bulk purchasing 5) marketing economies - advertising - distribution 6) financial economies 7) managerial economies a decrease in average revenue in perfect competition - ANSWER: when a supply curve shifts to the right, the price of a product lowers which lowers the average revenue received by a firm. In this case the AR=MC curve shifts downwards. Now the average cost curve is always higher than the average revenue curve, meaning that loss is made. Even now the best profit a firm can make is at the point where MC=MR. The loss is the square drawn from this point straight to where it meets AC, to the vertical axis and to P. In this situation some firms would leave the industry, supply curve would shift to the left and industry would be back in equilibrium. a firm - ANSWER: a business enterprise producing goods of services a firm in imperfect competition making abnormal profit / normal profit / a loss - ANSWER: both MR and AR are falling, MR quicker than AR. Profit is maximized where MR cuts MC and at this output the difference between the average revenue and the average cost is the profit made by the company per one unit of output. If the whole square (profit per unit x the number of units) is considered, the total profit is found out. If the firm makes abnormal profit, the AC curve cuts the AR curve at two points. If only normal profit is made, the AC curve cuts the AR curve only at one point. If the firm is making a loss, the AC curve never cuts the AR curve. a firm in monopolistic competition making abnormal profit - ANSWER: since this is an example of imperfect competition, the AR and MR curves are downwards-sloping. The AC curve cuts the AR curve at two distinct points, and the largest abnormal profit is made where MC=MR. The firm is both allocatively and productively inefficient. a firm in monopolistic competition making normal profit - ANSWER: since this is an example of imperfect competition, the AR and MR curves are downward-sloping. The average cost curve touches the AR curve at the optimum output where MC=MR. This is the output that the firm produces, thus being both allocatively and productively inefficient a firm in perfect competition making only normal profit - ANSWER: the AR=MR curve is horizontal. The profit is maximized when the marginal cost curve meets the marginal revenue curve so when MC=MR. Since at this point the average cost curve only touches the average revenue curve, only normal profit is made. abnormal profit - ANSWER: any profit above the normal profit AC and TC curves - ANSWER: start in the same place but total cost is higher than the average cost from that point on wards advantages of price discrimination to the consumer - ANSWER: 1) less wealthy customers may be able to afford a product / a service that they wouldn't be able to buy without price discrimination 2) the total output is likely to be higher advantages of price discrimination to the producer - ANSWER: 1) total revenue may be increased as higher prices are charged from the group with an inelastic PED 2) a greater output may be produced, thus enabling economies of scale 3) profits gained in the market with inelastic demand may allow the firm to lower the prices in the market with elastic demand, thus driving out competitiors allocative efficiency - ANSWER: MC = AR, the economy is producing the best combination of all goods to meet consumers' wants..........................