eco

    Cards (38)

    • Price mechanism
      The process used in free economic systems and in the private sector of mixed economies to allocate resources
    • Price mechanism
      1. Demand and supply forces determine the price of a product
      2. If demand increases, price rises due to shortage
      3. Price acts as a signal to producer to increase supply
      4. If demand decreases, price falls due to surplus
      5. Price acts as a signal to producer to decrease supply
    • Market clearing point
      Equilibrium point where demand and supply are equal
    • Shortage of product
      Price rises, quantity demanded decreases, supply increases
    • Surplus of product

      Price falls, quantity demanded increases, supply decreases
    • Joint demand
      Two goods tend to be demanded together
    • Increase in demand for one joint demand good
      Increase in demand for the other
    • Increase in price of one joint demand good

      Decrease in demand for the other
    • Competitive demand

      Goods are close substitutes
    • Increase in price of one competitive demand good
      Increase in demand for the other
    • Joint supply
      Two or more goods are produced together
    • Increase in supply of one joint supply good
      Increase in supply of the other
    • Competitive supply
      Increase in supply of one good results in decrease in supply of the other
    • Joint demand is when consumers require a combination of 2 or more products for maximum consumer satisfaction
    • Competitive demand means consumers can derive equal satisfaction from substitute products
    • Short run
      Period of time when at least one factor of production is still fixed
    • Long run
      Period of time when all factors of production are variable
    • Variable cost (VC)

      Costs which vary directly with output
    • Fixed cost (FC)

      Costs which do not vary as output changes
    • Total cost (TC)

      Total cost of producing a certain amount of output, calculated as FC+VC
    • Marginal cost (MC)

      Additional cost of producing one more unit of output
    • Average fixed cost (AFC)
      Constantly decreases as fixed cost is divided by increasing output
    • Average variable cost (AVC)
      Falls initially then increases as diminishing returns set in
    • Average total cost (ATC)
      Falls initially then increases as both AFC and AVC are added together
    • Optimum output
      Output where ATC is at its minimum, representing the most efficient output
    • Law of diminishing marginal returns
      In the short run, as more variable factors are added to the fixed factor, there is initially a decrease in cost per unit but then diminishing returns set in and cost per unit starts to increase
    • Internal economies of scale
      Cost advantages a firm gains as it grows in size, leading to a decrease in average cost in the long run
    • Internal economies of scale
      • Increased division of labour and specialisation
      • Bulk purchasing power
      • Lower borrowing rates
      • Improved marketing
      • Increased R&D
      • Provision of employee benefits
    • Internal diseconomies of scale
      Cost disadvantages a firm faces as it grows too large, leading to an increase in average cost in the long run
    • Internal diseconomies of scale

      • Management problems
      • Communication problems
      • Coordination problems
    • Returns to scale
      What happens to returns when factors of production are altered
    • Types of returns to scale
      • Increasing returns to scale
      • Decreasing returns to scale
      • Constant returns to scale
    • Profit
      TSR - TC
    • Normal profit
      Profit required to keep entrepreneur in current firm
    • Abnormal profit
      Profit over the normal profit
    • Short run shutdown point
      Point when firm can no longer pay variable costs
    • Factors impacting shutdown decision
      • Firm size
      • Firm reserves
      • Length of low demand
    • Causing average costs to fall in short run
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