(H2E) Firms and Decisions

⋆ ˚Key Terms 𝜗𝜚 ˚ ⋆ Item . ᐟ Definition> ᴗ < Firm UnitofdecisionmakingwhichcombinesFOPtoproduceagoodorservice,assumedtomaximiseprofitinShortRunandmayhaveotherobjects/beunabletodoso(CanbeSmallandMediumEntreprises-SMEsorMulti-NationalCompaniesMNCs) Plant ^^Firmisaproductionunit Industry Madeupofallfirmsproducingthesameproducts/groupoffirmsinaparticularfield Explicit/Implicitcosts Caneitherbeexplicitcosts(coststhattaketheformofactualcashpayments,likewages,+interestonborrowedcapital+rent)orimplicitcosts(opportunitycostsofusingthefirm'sownresources,likethecostofafirmfocusingtoomuchontheadvertisingovertheRnD) Fixed./Variable/Totalcosts Eitherfixedcosts(coststhatdonotchangewiththelevelofoutput)orvariablecosts(coststhatchangewiththelevelofoutput)ortotalcosts(=totalfixedcosts+totalvariablecosts) Short/Longrun EitherShortrun(atleastonefixedFOP,outputcanonlybeincreasedbyusingmorevariablefactors)ORLongrun(allfactorofproductionsarevariable) Costs/revenue Costsishowmuchyouhavetospendtocreatesomething,revenueishowmuchyouearnfromsellingsomething MarginalC+R/AverageC+R Marginalmeansthecost/revenueincurredfromproducinganadditionalunitofoutput(changeinCorR/Changeinoutput),Averagemeansthetotalcost/revenueperunitofoutputsold,(TotalCorR/TotalOutput) TotalRevenue Thefirm’stotalearningsfromasaleofaparticularamountofoutput(PricexQuantity) AccountingProfit TR-ExplicitCosts

EconomicProfit TR-ExplicitCosts-ImplicitCosts LongRunAverageCost Showsthelowestperunitcost/lowestaveragecostthefirmcanattainateverygivenoutputlevel,anypointontheLRACisproductivelyefficient Productiveefficiency Whenafirmisproducingitsoutputatthelowestcostpossible EconomiesofScale Whenincreasingthescaleofproductionleadstoalowercostperunitofoutput,eitherinternal(thefirmexpandsitsscaleofproduction)orexternal(theindustryexpands) DiseconomiesofScale Whenincreasingthescaleofproductionleadstoahighercostperunitofoutput MinimumEfficientScale(MES) Sizebeyondwhichafirmcannotachieveanymoreinternaleconomiesofscale/lowestpointontheLRAC/Growthpastherewouldcauseahighercosttothefirm,expressedasapercentageoftotalsizeofthemarketortotaldomesticproduction Indivisibilities Thephysicalinabilitytorunequipmentbelowitsoptimaloperationalcapacity Perfectlycompetitivemarketstructure manybuyersandsellers+homogenousproduct+eachsellerhasinsignificantmarketshare+nobarrierstoentry/exit+perfectknowledge(tendtobemoretheoretical,usefultocomparewithotherMS)=firmhasnomarketpowertoinfluenceprice MonopolisticcompetitionMS Largenumberofsmallfirmsrelativetomarketsize+ eachfirmshavesomedegreeofmarketpower+slightlydifferentiatedproducts+lowbarriersotentry/exit+imperfectknowledge+ OligopolisticMS Fewdominantfirmsrelativetomarketsize+canbedifferentiated/homogenousproduct+highbarrierstoentry/exit+imperfectknowledge MonopolisticMS Singleproducer+noclosesubstitutesforuniqueproduct+completebarrierstoentry/exit+imperfectknowledge=no

competition Perfectlycontestablemarkets Marketswherenewfirmscanentereasilyandexitwithoutsignificantcosts->competitionthatk