Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
    1. Cost theory
    2. Calculating costs
    3. Short-run
    4. Long-run
    5. Internal economies of scale
    6. External economies of scale
    7. Diseconomies of scale
    8. Long run cost curves
    9. The very long run
    10. Revenues
    11. Revenues - notes
    12. Profit
    13. Profit - notes
    14. Combining revenue and cost curves
    15. Profit maximisation - price taker
    16. Profit maximisation - price setter
    17. Alternative aims of firms
    18. Profit, sales and revenue maximisation
    19. Perfect competition
    20. Perfect competition - notes
    21. Short-run to long-run - profits
    22. Short-run to long-run - losses
    23. Shut down price, break-even price
    24. Efficient allocation of resources
    25. Monopoly and oligopoly
    26. Monopoly and oligopoly - introduction
    27. Growth and power
    28. The model of monopoly
    29. Monopoly - profit maximisation
    30. Monopoly equilibrium
    31. Monopoly v. perfect competition
    32. Economic efficiency in perfect competition
    33. Economic efficiency in perfect competition and monopoly
    34. Efficiency and market structure
    35. Monopolistic competition
    36. Monopolistic competition - notes
    37. Monopolistic competition in the short-run
    38. Monopolistic competition in the long run
    39. Oligopoly
    40. Oligopoly - notes
    41. Advertising and branding
    42. Product innovation
    43. Theories of oligopoly - non-collusive
    44. The kinked demand curve theory
    45. Kinked demand curve - change in cost
    46. Cut-price competition (predatory pricing)
    47. Theories of oligopoly - collusive
    48. Forms of collusion
    49. Price discrimination
    50. Equilibrium of the discriminating monopolist
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

Long run cost curves

The long run cost curve of a firm is sometimes called an 'envelope' curve as it envelopes all the short run average cost curves. Consider the different ways that capital intensive and labour intensive industries develop. First, some definitions:

• Capital-intensive firm - firm where its cost structure is dominated by fixed costs.
• Labour intensive firm - firm where its cost structure is dominated by variable costs (this may be, but does not have to be labour).
• Cost structure - the relationship between fixed and variable costs for a firm.

Capital-intensive activities have long, deep long-run average cost curves. Small firms cannot compete against large ones; the difference in average cost is too great. A few large firms, with perhaps a few small but very specialist businesses, will dominate industries. Examples here would include the petro-chemical industries. Look at Figure 2.

Figure 2 Long-run AC curve for capital-intensive business

Labour intensive activities have short and relatively flat long-run average cost curves. There is little advantage in being large, so the industry develops with many small firms. Examples would include the fishing industry in Asian countries where the industry comprises many family-run firms using basic fishing equipment and small boats. Look at Figure 3.

Figure 3 Long-run AC curve for labour intensive business

This means that it is very expensive to try to enter a capital-intensive industry. The minimum scale of operation will be high and will require a large investment of capital. The risk will be high, and the capital will be hard to raise. The cost becomes a real barrier to entry. The potential reward, however, will be large.

On the other hand, it is much easier to enter a labour intensive industry. The minimum scale of operation will be low, as will be the initial capital investment. The risk will be low, and not much capital will need to be raised. Cost will not be a barrier to entry, but the potential rewards are also smaller.

1

Economies of scale Match the following examples of economies of scale with their classification. a) A large company negotiates a loan at a preferential interest rate Choose... Specialisation economies of scale Technical economies of scale Risk-bearing economies of scale Financial economies of scale Bulk-buying economies of scale b) The introduction of larger oil tankers makes oil transport cheaper Choose... Specialisation economies of scale Technical economies of scale Risk-bearing economies of scale Financial economies of scale Bulk-buying economies of scale c) Growth in demand enables a firm to negotiate a better deal with its suppliers for ordering more Choose... Specialisation economies of scale Technical economies of scale Risk-bearing economies of scale Financial economies of scale Bulk-buying economies of scale d) A firm with very seasonal demand diversifies into other areas to make demand more consistent all year round Choose... Specialisation economies of scale Technical economies of scale Risk-bearing economies of scale Financial economies of scale Bulk-buying economies of scale e) Growth of the firm allows them to employs a financial controller for the first time Choose... Specialisation economies of scale Technical economies of scale Risk-bearing economies of scale Financial economies of scale Bulk-buying economies of scale Yes, that's correct. Well done.No, that's not right. Try again.Your answer has been saved.

2

Capital and labour intensive Which of the following industries would you expect to be capital intensive? (Select all appropriate answers) a) Glass production b) Computer game development c) Steel production d) Aircraft production e) Fruit growing Fruit growing and computer game development both require significant levels of labour and so would generally be described as labour intensive. Fruit growing and computer game development both require significant levels of labour and so would generally be described as labour intensive. Your answer has been saved.