theory of firm in befa

theory of firm in befa

Satisficing: it is likely that the managers make enough profit to keep the owners of the firm happy. If competition is strong, the company will need to not only maximize profits but also stay one step ahead of its competitors by reinventing itself and adapting its offerings. A firm is a business organization—such as a corporation, limited liability company, or partnership—that sells goods or services to make a profit. When PED is unitary any firm wishing to increase revenue should leave the price unchanged, since revenue is already maximised. Interdependent: may collude to act as a monopoly and maximize industry profits. The use of cash to invest in assets would undoubtedly hurt short-term profits but would help with the long-term viability of the company. Increasing returns to scale: long run unit costs are falling as output increases. Increase revenue and competitive behaviour may allow a firm to gain monopoly power. Specialisation: a larger firm is able to have more management specialised to different roles, thus making the firm more efficient. Consumers of the elastic sector find prices more affordable, Increasing total output makes products more available to more consumers, Consumers with inelastic demand may have to pay ore – exploitation. The profit maximising level of output: if a firm wishes to maximise its profits, it should produce at the level of output where MC cuts MR from below. Long run: period of time in which all factors of production are variable. In the short run, a firm produces at profit maximizing (MC = MR), but not productive (MC = AC) nor allocative (MC=AR) level of output in a monopolistic competitive market, The long run equilibrium of the firm in monopolistic competition. © 2015 by IB Study. Second degree price discrimination: individuals pay according to their consumption (utility companies). X-efficiency is the degree of efficiency maintained by individuals and firms under conditions of imperfect competition. Examples for oligopoly include oil companies, motor cars, shampoo products, coffee shops and supermarkets. The firm can sell any amount at this price, as it has no effect on the industry. Micro means „one millionth‟. If the demand increases and the firm wishes to increase quantity produced, then more than one variable factor can be used in the short run to move along the SRAC curve to produce more. Control and communication: a larger firm has a greater need for effective communications as the management will find it harder to control and coordinate the firm, so communication breaks down and unit costs increase. Financial economies: banks usually charge lower rates to larger firms (less risk), insurance is likely to be less and loans are more easily accepted. One large firm: the firm is the industry so has complete market share. Potential entrants believe that they cannot sufficiently differentiate themselves to generate strong brand loyalty. Hoover vacuum cleaners. This builds up brand loyalty. All production takes place in the short run. All production takes place in the short run. Products are differentiated: some are less or more than others, e.g. However, companies that utilize fixed assets, like equipment, would ultimately need to make capital investments to ensure the company is profitable in the long-term. Marginal revenue (MR): the extra revenue the firm gains when it sells one more unit of product in a given time period. Price discrimination: a producer sells identical products to different consumers at different prices. First degree price discrimination: individuals pay different prices depending on their willingness to pay. Consumers are fully aware of prices, quality and availability of goods/services, Identical homogeneous products: there is no differentiation in the product, such as branding or marketing, Many individual buyers: no has any control over the market price, Perfectly mobile factors of production: land, labour and capital can change in response to market conditions. Fixed factors: normally capital or land, but could also include a type of highly skilled labour. Competing firms have no agreement concerning their behavior and tactics. In neoclassical economics—an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand—the theory of the firm is a microeconomic concept that states that a firm exists and make decisions to maximize profits. For example, the head baker is paid $13 per hour, but he could have taken the job of an accountant at $34 per hour so the implicit cost is this difference in salary. In the elastic market, competitors may be driven out – the firm undercuts them by using revenue from inelastic market to lower elastic prices. Small scale/local advertising: widely used to make product less elastic. Profit-Maximizing Theories 2. The cost of inputs and unit cost of production is reduced. Price increase is elastic and price decrease is inelastic, so any change in price causes TR to fall. In an example of a cake shop fixed factors include: It is efficient to add bakers up to a certain point, but because of the fixed factors, after this point adding workers is less efficient - too many cooks spoil the broth. So no one leaves or enters. Collusion is impossible: too many firms to make and maintain an agreement. The firm’s revenue is covering more than their total costs, including opportunity costs. Building on the work of Ricardo as well as Smith, Marx developed a distinctive labour theory of value and associated theory of capitalist production. All planning takes place in the long run. UNIT – 1. The length of the short run depends on the time it takes to increase the quantity of the firm’s fixed factors. Collusive oligopolies act with a monopolist’s power, so the graph is the same. The firm is not covering its total costs. Results in a bigger industry, with smaller firms. Total profit = Total revenue – Economic cost (explicit and implicit). The Theory of Firm Under Perfect Competition In economics, we deal with some theoretical concepts that require us to make some unrealistic assumption. These are the earnings that a firm could have had if it had employed its factors in another use or if it had hired out or sold them to another firm. Non-Optimizing Theories. In this case, utility refers to the perceived value a consumer places on a good or service, sometimes referred to as the level of happiness the customer experiences from the good or service. Fairly large number of relatively small firms: one firm’s actions has little impact on others - independent. The theory of the firm influences decision-making in a variety of areas, including resource allocation, production techniques, pricing adjustments, and the volume of production. Transport economies: large bulk orders may not charge delivery costs and larger firms can afford their own cheaper fleet, which does not include other firms’ profit margins. Brand loyalty: consumers refer to the product as the brand, e.g. The theory of the firm works side by side with the theory of the consumer, which states that consumers seek to maximize their overall utility. This diagram shows profit maximizing (MC=MR), but not productive (MC=AC), not allocative (MC=AR) level of output. By using Investopedia, you accept our. A percentage increase in all factors of production causes a directly proportional percentage increase in output, long run average costs are constant. Profit-Maximizing Theories: The traditional objective of the business firm is profit-maximization. It is therefore usually in a monopoly or oligopoly.

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