Firm: Organisation that brings together FOP (land, labour, capital, entrepreneurship) to product goods and services for sale
Industry: group of firms that produce a single g/s (or related)
Explicit costs: payment made to outside suppliers of inputs
e.g. salaries/wages, raw material, overhead costs
implicit costs: do not involve direct payment of money, sacrifice of some alternative
e.g. salary forgone/interest forgone (factors are already owned by firm)
accounting cost: explicit cost
economic costs → opportunity cost to society (explicit + implicit costs)
traditional objective = profit maximization
profit = revenues – cost.
Non traditional ...view middle of the document...
TOTAL COST = TFC + TVC
AVERAGE TOTAL COST = AFC+ AVC
PRODUCTION IN THE LONG RUN
- Price of variable factors are constant
- State of tech is constant
- Efficient use of resources
Increasing/constant/decreasing returns to scale
o/p increase more than proportionately to increase in inputs → falling section of LRAC
Reducing avg cots of production.
LRAC shows how avg cost varies with output (all factors are variable)
Output rise → avg costs falls due to specialization and other large sale production advantages → falling part of LRAC (economies of scale)
LRAC will not rise as sharply as in SR as the size of the firm can be increased to deal with output increases more satisfactorily.
INTERNAL ECONOMIES OF SCALE
Saving in costs due to firm’s expansion. Costs/per unit fall.
- larger plant size can more effectively use individsible factors to raise average output and reduce LR avg costs.
- Inputs are large and costly, but can sig. increase output and reduce avg COP
- If output is small → operating below max. capacity
- cost advantages
- any capital equipment that is used to contain materials e.g. oil tanker, will tend to cost less per unit of output the larger its size.
- large factory can take a produce through several stages
- saves time and cost in transporting
specialization and division of labour
- simpler and more repetitive jobs
- less training
- higher efficiency
- saving of time (switching of operations)
- workers are equipped with specific skills that can be employed in specific areas
- esp. for mass production techniques
by product economies
- larger plants can make more economical use of materials
- waste to a small plant can be used in manufacture of by products in larger plant → more efficient usage of resources lowers avg cost.
- employing specialists
- greater efficiency
- greater use
- doubling of output will not require doubling of staff
- fall in avg COP
decentralization of decision making
- Flow of info within firm is reduced
- preferential treatment, buy materials in bulk
- able to dictate requirements with regards to price, quality and delivery more effectively
- unit cost of transportation also lower
- Bulk advertising
- Spreading advertising cost over a larger vol. of sales
- Lower packaging cost per unit
- Easier and cheaper
- Banks charge lower interest rates larger loans due to better credit ratings
Public limited companies
- Can raise capital more easily thr issues of shares/debentures to public
- Public has more confidence in large firms → hold their shares
- theft, fire. Probability of occurrence can be calculated and insured against
non- insurable risks