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Microeconomics Basics Essay

1216 words - 5 pages


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...

then rises



- 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.


Saving in costs due to firm’s expansion. Costs/per unit fall.

factor indivisibility
- 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

Increased dimensions
- 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.

Linked process
- 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.


Functional specialization
- 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


Bargaining advantage
- 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 sales
- Bulk advertising
- Spreading advertising cost over a larger vol. of sales
- Lower packaging cost per unit


Raising funds
- 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


Insurable risks
- theft, fire. Probability of occurrence can be calculated and insured against
non- insurable risks

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