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Economic Notes For Exam

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28 views5 pages

Economic Notes For Exam

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MAK- 47
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Economic notes for the exams to study

COSTS (Fixed costs, variable costs, etc..)


Fixed costs are indifferent no matter the output (Do not vary with output )
Variable costs change depending on the output (Vary with output)

Total cost = total Fixed cost + total Variable cost


Average cost = Total cost/output
Average “ “= Total “ “/output

Output=Quantity

Average Fixed cost= Total fixed cost/Output


Average Variable Cost= Total variable cost/Output

Total revenue = total output* (Average) price per unit


Total Profit = Total revenue- Total cost
*UNIT OF CURRENCY NEEDS TO BE SHOWN

ELASTICITY

Price elasticity of demand = Percentage in change Quantity demanded / Percentage change in


price
(PED)

Price elasticity of supply = Percentage in change Quantity supplied/ Percentage change in price
(PES)

Income elasticity of demand = Percentage change in Demand / Percentage change in Income


(YED)

%change in …= New Value-Original Value/Original Value*100

PED ALWAYS RESULT IN negative integers as they are inversely related

Output/GDP per capita(head) = total value/population

DIVISION OF LABOR

Breaking down the production process into small parts with each worker allocated to specific
tasks

Specialization
Production of a limited range of goods by individuals, firms, regions, or countries
Two main subtitles for Division of Labor= Business and Labor

(Page 108)

ECONOMIES OF SCALE

= large firms
= Output (increases) -> Average Cost (decreased)

If the business is too large = Output(increased) which leads to an increase in Average cost, thus
it is called diseconomies of scale

INTERNAL ECONOMIES OF SCALE

internal economies of scale are the cost-benefit that an individual firm can enjoy when it grows

Purchasing economies
Large firms that buy lots of resources get cheaper rates(Bulk buying)

Bulk Buying
Buying goods in large quantities, which is usually cheaper than buying in small quantities

MARKETING ECONOMIES

several marketing economies exist. It may be cost-effective for a large for, to run its delivery
vehicles. For a large firm, with lots of deliveries to make, this would be cheaper than paying a
distributor, marketing economies can occur because some marketing costs, such as producing
a television advert, are fixed. These costs can be spread over more units of output for a larger
firm, therefore, the average cost of the advert is smaller than a large firm.

**ECONOMIES OF SCALE REDUCE AVERAGE COST**

TECHNICAL ECONOMIES

Larger factories are often more efficient


There can be more specialization and more investment
LARGE FIRMS WILL MAKE BETTER USE OF ESSENTIAL RESOURCES THAN SMALLER
FIRMS

FINANCIAL ECONOMIES OF SCALE


LARGE FIRMS GET ACCESS TO MONEY MORE CHEAPLY, THEY ALSO HAVE A VARIETY
OF RESOURCES TO CHOOSE FROM, AND THEY CAN RAISE MONEY BY SELLING
SHARES. LARGE FIRMS CAN PUT PRESSURE ON BANKS WHEN NEGOTIATING THE
PRICE OF LOANS (INTEREST), BANKS ARE OFTEN HAPPY TO LEND LARGE AMOUNTS
TO LARGE COMPANIES AT LOWER INTEREST RATES

MANAGERIAL ECONOMIES

Being able to afford lots of specialist managers increases productivity and efficiency

RISK BEARING ECONOMIES


A company that has income from diverse business ventures. So, if they faced trouble with one
service or product, the other ventures will keep the company running.

EXTERNAL ECONOMIES OF SCALE

External economies of scale cost benefits that all firms in an industry can enjoy when the
industry expands

SKILLED LABOUR
if an industry is concentrated in one area, there may be a build-up of labor with the skills and
work experience required by the industry. As a result Training costs will be lowered when the
workers are recruited. It is also likely that local schools and colleges will provide vocational
courses that are required by local industry

INFRASTRUCTURE
if a particular industry dominates a region, the roads, railways, ports, buildings, and other
facilities will be shaped to suit that industry’s needs.

ACCESS TO SUPPLIERS
An established industry in a region will encourage suppliers in that industry to set up close by.

SIMILAR BUSINESSES IN THE AREA


When firms in the same industry are located close to each other, they are likely to cooperate, so
that they can all gain, for example, they might work together to share the cost and benefits of a
research and development center,

SMALL FIRMS
The vast majority of firms in many countries are small, and governments in many countries have
encouraged the development of small businesses. Because small businesses in a tertiary sector
such as services are effective on small scale.
LARGE FIRMS
The largest firms in the world are multinational companies.

LARGE FIRM ADVANTAGES:

economies of scale, the main advantage of large firms is that their average costs are
likely to be lower than those of smaller rivals.

Market domination:
Large firms can often dominate a market. They have a higher profile in the public eye
than small firms and benefit from such recognition

large-scale contracts:

There are both small firms and large firms in the construction industry, however, a small firm
could not compete with a large firm for a contract to build a new motorway for the government.

Economies of scale
⁃ Average cost (decreased)
⁃ Profit (increased)
⁃ Therefore (increased investment)
⁃ Therefore (more growth)
⁃ Price (Decreased)
⁃ Therefore Gets an advantage in a competitive market (domestically and
internationally)

Customer benefits from large firms (economies of scale)


⁃ Cheaper prices

Disadvantages of economies of scale for large firms


⁃ Excessive bureaucracy (Takes too long to make executive decisions because of
paperwork)
⁃ Coordinates and control problems, because of a huge volume of employees
operating, there may also be a need for more supervision that will raise costs.
⁃ Poor motivation, workers can have trouble seeing meanings in their work and
thus reduced productivity.

ADVANTAGES OF SMALL FIRMS :


⁃ Can adapt to change more quickly (etc, personalized product customer
requested)
⁃ Personal service: (Owner can offer services to the customer directly)
⁃ Lower wage cost: (Many workers in small firms do not belong to trade unions and
as a result, their negotiating power concerning wages is weak, therefore the owner can pay
legal minimum wage)
⁃ Better communication: Communication tends to be informal and more rapid than
in larger organizations. The owner will be in close contact wire all staff and can exchange
information quicker and more efficiently. As a result, decision-making will be faster and workers
may be better motivated.
⁃ Innovation: Although small firms often lack resources for research and
development, they may be surprisingly innovative. One reason for this is that small firms face
competitive pressure to innovate. For example, if they fail to come up with new ideas for their
products, they may lose market share, it may also be because small firms are more prepared to
take a risk. Perhaps they have less to lose than large firms.

Disadvantages of small firms:


⁃ cannot exploit economies of scale (higher average cost than large firms)
⁃ Lack of finance as they struggle to raise finance and their choices of financial
sources are limited. (limited capital) Financial institutions and money lenders see small firms as
more risky candidates for loans.
⁃ Difficulty in attracting quality staff, as they can’t have any promotion prospects
and their salary range is unsatisfactory compared to large firms
⁃ Vulnerability: small firms may have difficulty surviving compared to large firms if
trade conditions are challenging. There may be times they are forced to accept unattractive
takeover terms.

Oligopoly - Market dominated by few large firms

Oligopoly characteristics

FEW FIRMS

one of the main features of oligopoly is that the market often contains just a few firms, there is
no exact number but it could be as small as three, four, five, or six for example.

The difference between an oligopoly and a monopoly is that there is no competition in monopoly
and a little competition in an oligopoly

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