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71 Cards in this Set

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In the Firm's Behavior, What is the main OBJECTIVE?
*To maximize profit subject to the production technology and capabilities of a firm.

*To Maximize Profit based on a certain amount of output.
How do you calculate PROFIT?
Profit = Total Revenue - Total Costs
What does r mean?
It is the per unit cost of producing output.
What is Total Cost?
It is the sum of all fixed and variable (Q) costs,

an efficiency relationship that shows the lowest possible total cost the firm would incur to produce a level of output, given the firm's technological capabilities and the prices of factors of production.
What is Fixed Cost?
Cost Incurred even if output is 0.
What are some examples of Fixed Costs?
Building, Land, Machinery, Rent.
What is another name for Fixed Costs?
Sunk Costs
Whare is Variable Cost?
Are costs that vary with output produced and can be avoided by ceasing production.
What is Average Total Costs?
It is the ratio of the sum of Fixed Costs and Variable Costs to Quantities produced.
What is the formula for ATC?
ATC= (FC+VC)/Q
What is Average Variable Cost?
Is the ratio of variable costs to quantities produced
What is the formula for AVC?
AVC=(VC)/Q
What is the formula for AFC?
AFC=(FC)/Q
What is Economies of Scale?
Fall in average costs as outputs increase
What is Constant Returns to Scale?
Average costs do not vary with output.
What is Diseconomies of Scale?
Average costs rises as output increases.
What are some reasons for Economies of Scale?
*Average costs decline as fixed cost are spread over larger output.
*Specialized training: Learning Curve Effects.
What is Marginal Cost?
Is an increment in total costs from producing one more unit of output. It is Upwar Sloping: Output of fimr increases with increase in price.
What is the Formula for MC?
MC= dTC / dQ
And AC=MC
The distinction between Fixed cost and Variable cost also depends on what?
On teh time period allowed for adjustment.
What happens in the Long Run?
Producers can adjust fixed costs. "In the Long Run all costs are variable" ANd a firm produces at its minimum average cost.
What are the two types of profits?
Economic Profit and Accounting Profit.
What is Accounting Profit?
Sales Revenue - Accounting Costs. (eg. Income Statement)
What is Economic Cost?
The opportunity costs is the value of best foregone alternative use of those resources.
What is Economic Profit?
Accounting Profit - Economic Cost
What are some properties of Cost Functions?
*Cost curves are dependent on amount produced holding factor prices constant. (Increases in factor prices can shift cost curves up)
*One can infer the cost curve from the production function (input-output) (Knowing a firm's cost is the same as knowing its technologies).
What is Demand?
Various quantities of a particula commodity that consumers are willing and able to buy as the price of that comodity varies, with all other factors that affect demand held constant at a given time period.
What is the Law of Demand?
Price and Quantity is inversely related.
What is Own-Price elasticity?
Responsiveness of quantity demanded to a change in price with other factors held constant.
What is the formula for Own-Price elasticity?
n= dQ/dP * P/Q
What is the impact of a given change in price on total revenue?
*If demand is elastic, price and total revenue vary inversely.
*If demand is inelastic, price and total revenue vary directly.
What are some factors impacting Demand Inelasticity?
*Few Substitutes
-Implying a differentiated product
*Buyer Expenditures are not a large fraction of total expenditures.
-Eg. Gas, DVD's premium coffee, Krispy Kreme Donuts.
What is the difference between Brand vs. Industry level Elasticities?
Brand level tends to be larger than industry level elasticity.
-Consumers can switch across brands with in an industry while industry products tend to have fewer substitutes.
What is Total Revenue?
Indicates how the firm's sales revenues vary as a function of how much product it sells.
What is Marginal Revenue?
It is the rate of change in TR from the sale of an additional unit of output.
What is the formula for TR?
TR = P*Q
What is the formula for MR?
MR = dTR/dQ
What happens with MR for Elastic Demand (n>1)?
MR>0
Increase in output from a reduction in price will raise TR.
What happens with MR for inelastic Demand (n<1)?
MR<0
Increase in output from a reduction in price will lower TR.
What should we assum when interpreting MR?
That a firm faces a downward sloping demand.
What is the Firm Optimizing Behavior?
Choice of output determined by MR=MC
-Produce the quantity amount when the additional revenue earned from producing one increment of output just equals its additional costs.
What is the formula to calculate the Learner Index?
(P-MC)/P = 1/-n
What is the relationship of the Learner Index with the Elasticity of Demand?
They are inversely related.
In the Firm Optimizing Behavior SR/LR, what happens when the choice of output determined AT Prices > AVC(SR) or ATC(LR)?
MR=MC
-Produce the quantity amount when the additional revenue earned from producing one increment of output jsut equals its additional costs.
In the Firm Optimizing Behavior SR/LR, what happens when the choice of output determined AT Prices < AVC(SR) or ATC(LR)?
Firms shut down: No output produced. (Shut down price).
What happens on a Price Taking Firm (Perfectly competitive firm)?
MR=P=MC
What are Horizontal Boundries of the firm?
Deal with quantities (Scale) and varieties (Scope) of products and services that are produced by a firm (Within a given industry).
What is Scale?
Quantities
What is Scope?
Varieties
What is Economies of Scale?
Declining average cost with volume.
*Bigger is better (up to a certain size).
What is Economies of Scope?
Cost savings achieved when different goods/services are produced "under one roof"
What are some indicators of Economies of Scale?
*When a marginal cost is less than average cost, there are economies of scale
*Fixed costs are spread over a large volume of output.
What is the Minimum Efficient Scale?
The point up to where the firm is willing to produce.
What is Diseconomies of Scale?
Average cost eventually start increasing as capacity constraints are met or exceeded. (Limits to the size of the growth).
What is the difference between Economies of Scale and Economies of Scope?
*Economies of scope refers to the costs savings from increasing the VARIETY of goods produced within a firm.
*Economies of scale refers to the costs savings from increasing the QUANTITY of goods produced within a firm.
What are some common expressions that describe strategies that exploit the economies of scope?
*Leveraging core competencies
*Diversification into related Products
*Complementary assets or synergies
What are some Sources of Economies of Scale/Scope?
*Indivisibilities and the spreading of Fixed costs
*Specialization
*Purchasing
*Advertising
*R&D
What are Indivisible (Lumpy) resources?
A minimum amount of input is required in the production process that cannot be scaled down. And indivisible resource is a Fixed Cost
What is the relationship between indivisibilities and AC?
Indivisible resources are capital intensive, are a higher fixed cost component, it impacts the curvature of AC, it is a tradeoff between Flexibility and low cost.
What are some SR adn LR Strategies?
*Cost reduction through better capacity (SR Economies of Scale)
*Cost reduction by switching to high fixed cost technology (LR Economies of Scale)
What are Economies of Scale and Boundries?
*Larger markets lead to specialized firms
*As markets get even larger, the specialized activity may become "in house" duet to economies of scale
What are some Economies of scale in purchasing?
*Large buyers can get volume discounts
What are some Economies of Scale in R&D?
*High Fixed costs: Minimum feasible size (indivisible) for R&D projects and R&D departments.
*Economies of scope in R&D; ideas from one project can help another project.
What is Strategic Fit?
is defined as complementary resources that yield economies of scope and it renders piece-meal copying of corporate strategy by rivals unproductive, it is also essential for long term competitive advantage.
What are the sources of Diseconomies of scale?
*Increasing Labor costs (Labor unionization)
*Bureaucracy effect (Slack workers)
*Scarcity of specialized resources (management labor)
What is the Learning Curve Strategy?
Expand output rapidly to benefit from the learning curve and achieve a cost advantage.

May lead to losses in the short run term, but ensure long term profitability.
What is the definition for the Vertical Boundaries of the firm?
The activities that the firm performs itself as opposed to purchases from independent firms in the market.
What does it mean by "Choice between the 'invisible hand' of the market and the 'visible hand' of the organization?
It means if you should MAKE OR BUY
What are some determinants of Making vs. Buying?
Decision depends on the costs and benefits of using the market as opposed to performing the task in-house

Outside specialists may perform a task better than the firm can

Intermediate solutions are possible.
What are the benefits of Using the Market?
*Market firms may hold low cost production technology
*Market firms can achieve economies of scale htat in-house units cannot
*Market firms are subject to market discipline, whereas in-house units may be able to hide their inefficiencies behind overall corporate success.
What are Agency Costs?
*Agency costs arise when managers and workers knowingly do not act in the best interest of their firm
*The incentives to be efficient and innovative are weaker when a task is performed in-house
*Agency Costs are particularly if the task is performed by a "cost center" within an organization.
*It is difficult to internally replicate the incentives faced by market firms.