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11 Cards in this Set
- Front
- Back
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What is the law of diminishing returns and when does it happen?
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Diminishing returns occurs in the short run. As additional units of a variable factor are added to a fixed factor the extra output (marginal product) of the variable factor will eventually diminish as the fixed factors become scarcer.
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Distinguish between the short run and the long run.
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The short run is when at least one factor of production is fixed e.g. Capital.
The long run is when all factors of production are variable. |
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Distinguish between fixed costs and variable costs.
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Fixed costs remain the same at all levels of output.
Variable costs increased with output in like with the law of diminishing returns. |
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What are economies of scale?
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Cost advantages that a business can exploit by expanding their scale of production in the long run. This reduces the long run average costs of production over a range of output.
E.G. -Technical (specialisation) -Purchasing (bulk buying) -Marketing -Financial (cheaper finance deals) -Managerial -Risk bearing |
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What are diseconomies of scale?
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The disadvantages of large scale production that can lead to increasing average costs.
E.G. -Problems of management - Maintaining communication -Demotivation of staff -Divorce of ownership |
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What are external economies of scale?
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The advantages firms gain as a result of growth of the industry.
E.G. -Supply of skilled labour -Reputation -Local knowledge and skill -Infrastructure -Training facilities |
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What are external diseconomies of scale?
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The disadvantages of growth in an industry causing cost to rise.
E.G. Competition for resources |
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What are mergers?
What are acquisitions? |
A merger is when two or more businesses agree to join together and become one large firm.
Acquisition is when one firm buys/takes over another. |
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What are the advantages of mergers and acquisitions?
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-Economies of scale
-Increased market share -Spreads risks if products are different -Reduces competition if a rival is taken over - Other businesses can bring in new skills -Easier to raise money with larger businesses. -Syngeries, get rid of duplications |
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What are the disadvantages of Mergers and Acquisition?
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-Diseconomies of scale if the business is to large
-Clashes of culture may reduce effectiveness -Redundancies may effect motivation -Conflict of objectives |
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Explain the different types of profit
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- Profit=total revenue-total cost
- Normal profit is the minimum level of profit needed to keep the factors of production in their current use in the long run (AR=AC) - Abnormal profit is any profit in excess of normal profit (AR>AC) - Subnormal profit is less than normal profit in the long run a firm will leave an industry (AR<AC) |
