(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->competitionthatkeepspricesincheckandencouragesefficiency Profits TotalRevenue-TotalCosts,whereTotalRevenue=PriceperunitxQtysold,whereitcanbesplitintoNormalProfit(TR=TC,zeroeconomicprofit),SupernormalProfit(TR>TC,economicprofits>0),SubnormalProfit(TR<TC,economicprofits<0) ProfitMaximisation MarginalRevenue=MarginalCostandwhereMCisrising,traditionalobjectiveoffirms Productdifferentiation Whenproductsaredifferentiatedeitherthroughrealdifferences(design,quality,materials)orperceiveddifferences(packaging,brainding,advertising) Homogenousgoods Perfectsubstitutesinamarket(sameineveryaspect),noneedfornon-pricecompetitionbyanyoneseller+littleincentiveforfirmstoinnovate Perfectknowledge Buyers(prevailingmarketprices,productquality)andsellers(technology,costcondition,productionprocessesusedbyotherfirms,availofsubstitutes)havealltheknowledgeofmarketconditionsandprices Barrierstoentry Factorswhichprevent/detertheentryofnewfirmsintoanindustryandtherebylimitthedegreeofcompetitionfacedbytheexistingfirms Naturalmonopoly WhenasinglefirmcanserveamarketmoreefficientlythanmultiplefirmsduetolowercostscausedbyhighBTEsandsubstantialstartupexpenses,comesupwhenproductionrequiressignificantfixedcosts Predatorypricing theillegalbusinesspracticeofsettingpricesforaproductunrealisticallylowinordertoeliminatethecompetition Sunkcosts Coststhathavebeencommittedbyafirmandcannotberecoveredonceithasenteredhteindustry Marketing Effortstakenbythefirmtopromoteitsgoodsorservices

Cartel Formalorganisationwherefirmsexplicitlyagreetocooperateinsettingpriceandoutputlevels Pricediscrimination Practiceofsellinganidenticalproductatdifferentpricestodifferentpricestodifferentconsumersandthesepricedifferencesarenotcausedbycostdifferences Thirddegreepricediscrimination Whereafirmdividesthemarketintotwoormoresub-marketsandchargesadifferentpriceineachsub-market Merger Legalconsolidationoftwofirmintooneentitythroughmutualagreementbetweenthetwofirms Acquisition Occurswhenonefirmtakesoveranotherandcompletelyestablishesitselfasthenewowner,targetfirmstillexistsasanindependentlegalentitycontrolledbytheacquirer Conglomerates Occurswhenfirmsfromtotallydifferentindustriesmerge Allocativeefficiency Definedastheallocationofresourcestoproducethecombinationofgoodsandservicesmostwantedbythesociety,achievedwhenP=MC(assumingnoexternalitiesarepresent) Productiveefficiency Definedastheproductionofgoodsandservicesatthelowestpossibleaveragecostofproduction Dynamicefficiency Definedasthesituationwherefirmsinvestintechnologysothatproductivityandproductqualitywillimproveovertime X-inefficiency/technicalinefficicency Arisesduetothelackofcompetitivepressure

EconomiesofScale intEOS ◌༘˚ ⋆｡⋆ . ✧ ˚ - Alwaysalwaysleadstoalowercostperunitoutit~!(alwayswritethisifyou’reexplaininganythinginEOS!)- ThelargertheiEOS,thebiggerthesizeandthefewertheno.offirmsinanindustry- Ifthere’sahighMES:lowdegreeofcompetitionasthereisonlyroomforasmallnumberoflargefirms +significantpossiblecostsavings(e.g:telecommunicationindustries) TechnicalEOS ManagerialEOS FinancialEOS CommercialEOS Risk-bearingEOS IncreasedSpecialisation:ifbigproduction,dividelabourintosimplertasks->Workersbecomebetteratthespecifictasktheyareassigned+lesstimewastedshiftingfromtasktotask +morescopeforuseofspecialisedmachinery Economiesofmanagement:Similartospecialisationoflabourbutintermsofmanagerialpositions,scopeofdivisionoflabourincreases->centralisedadminfordifferenttasks->higherproductivityofindividualmanagersintheirspecialisedroles=lowerAC CreditWorthiness:largerfirmshavehighsales->morevaluableassets->moreandbettercollateraltoofferbanks/financialinstitutions->moretrustworthyinthefinancialinstitutionsPOV->getbankloansatlowerinterestratesandbetterconditions Bulkpurchase:largerfirmscanbuysupplies/materialsatahigherdiscount>>Smallfirms Insurablerisk:largerfirmsareabletospreadthepremium/priceofinsuranceinperiodicpaymentsoveralargeamountofoutput=lowerpremiumpaidperunitoutput

Economiesofindivisibilities:Largermachineryusuallymoretechnicallysuperior->largerfirmcanutilizelargemachinesmoreefficiently andintensively Specialisationoflabourbyemployingspecialists=increaseproductivity(moreoutputperfixedinputwithnoadditionalcost) Accesstoothersourcesoffunding:onlylargefirmslisttheircompaniesinstockexchangetoraisecapitaliftheyneededit->largerfirmscansettheirpriceshighertogetmoremoney->cangetmoremoneywithoutpayingbackasmuchcomparedtoabank Bulkmarketing:promotesalesovermanydifferentavenues->spendmoreonadvertisingindifferentareas>>smallfirms->largeroutputofadvertisingtoincreaserevenue Uninsurablerisk:largerfirmscanprotectthemselvesbydiversifyingtheirproducts/+operatinginadifferentmarket/+diversifytheirresourcesforrawmaterials->lossfromproducingoneproductinonemarketmaybeoffsetbyprofitsfromanother=largerfirmswithmanydifferentbranchesbearaloweruninsurablerisk Greaterefficiencyoflargemachines:thebiggersomethingis,themoreefficientitisandthemoreitcanserve/do(e.g:normalbusvdoubledeckerbus)

extEOS ◌༘˚ ⋆｡⋆ . ✧ ˚ - Whenexperiencingexternaleconomiesofscale,thefirmwillexperience