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| Question | Answer |
| Total Fixed Cost (TFC) | costs that do not vary with outputs and costs exist even when output is 0. e.g: lease payments and rentals |
| Total Variable Cost (TVC) | costs that vary positively with output and such costs will be zero if output is zero. e.g: wages for hiring workers and cost of raw materials |
| Internal economies/diseconomies of scale | refer to a fall/rise in unit cost of production when the firm increases output by expanding its scale of production |
| List all the Internal Economies of Scale | 1. Technical: Specialisation & Division of Labour, Indivisibilities, R&D 2. Marketing Economies: Bulk Purchase, Large Scale Advertising 3. Administrative and Managerial 4. Financial 5. Risk Bearing |
| List all internal diseconomies of scale | Management Difficulties - prob in coordination and communication - low morale |
| External economies/diseconomies of scale | refers to a fall/rise in unit cost of production experienced by the firm as a result of growth in the industry |
| List all external economies of scale | 1. Economies of concentration: Trained Workforce, Better infrastructure 2. Economies of Information 3. Economies of disintegration |
| List all external diseconomies of scale | 1. Higher input of prices 2. increased strain on infrastructure |
| Minimum Efficient Scale (MES) | occurs at the output level where LRAC first stops falling. it corresponds to the lowest point on the LRAC. |
| Accounting Profit | TR - TC, where TC is the firms explicit costs only |
| Economic Profit | TR-TC, where TC is the sum of the firms explicit and implicit cost |
| Profit Maximisation | achieved at the level of output where the addition to the total revenue from the sale of the last unit is equal to the addition to total cost of producing it. MR = MC |
| Allocative efficiency | defined as the allocation of resources to produce the combination of goods and services most wanted by the society. This is achieved when P=MCA |
| Explain Allocative Efficiency | P > MC: consumer values the additional unit of good more than the resources required to produce it, net gain in social welfare if additional unit is produced P < MC: value that the consumer places on the additional unit of good is worth less than the opportunity cost of producing it, society better off with additional unit not produced |
| Productive efficiency | production of goods and services at the lowest possible average costs of production |
| Productive Efficiency for firm vs society? | Firm: produced at the lowest possible average costs = all points on the LRAC are productive efficient Society: min of LRAC curve where all internal economies of scale have been exploited |
| Dynamic Efficiency | situation where firms are technologically progressive in order to reduce the average cost of production and/or meet the changing needs and wants of consumers over time. |
| Characteristics of Perfect Competition | 1. Many small firms & competitors 2. Complete freedom of entry 3. Homogenous product 4. Perfect Knowledge |
| Impact of Perfect Competition | Efficiency: YES to productive & allocative efficiency, NO to dynamic efficiency Equity: YES as fairly distributed, NO because there may be considerable pre-existing inequality of income Consumer Welfare: YES: consumer sovereignty - determine what and how much to be produced + choice of many consumers, NO because lack of variety, undifferentiated products + no pressure as no competition |
| Monopoly | single supplier of a product or service for which there are no close substitutes. As it is the only seller, the firm is also the industry. |
| Characteristics of Monopoly | 1. Single Seller 2. Unique Product 3. Imperfect knowledge of product 4. High barrier to entry & exit |
| Define Barriers to entry | obstacles that prevent new firms from entering a market to compete with the existing firms. |
| Ways for Barriers to entry | 1. Substantial internal economies of scale 2. Control of essential raw materials or wholesale/raw outlets 3. Legal Barriers (e.g: patent, copyright, license) 4. Brand loyalty 5. Other tactics e.g: predatory pricing (selling below marginal cost to drive out competitors) |
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