EconomicsNotes

  A firm’s costs are made up of fixed and variable costs. Fixed costs do not change with output, and therefore fall when averaged. Variable costs do change with output, and will eventually always increase because of rising marginal costs, which in turn cause returns to diminish with each extra item of output before becoming negative.   The lowest point of each short-run average cost curve forms a point on the long-run average cost curve (the short run being the period when at least one factor of production is fixed and the long run being that when all factors can be varied.) It follows that there will be a point on the Long-run average cost curve when a firm reaches its lowest LRAC, and that the LRAC will have been falling as each successive SRAC falls ‘downwards’ along it.  The explanation for why this process occurs is not linked to any one cause, and could involve falls in wage, raw material, regulatory, or business costs.  They could also be the result of econo...

  Economic theory holds that competition between many small firms, with no barriers to entry or exit and an homogenous product, is an ideal state. This is because the consumer will be sovereign in such a situation, and each individual firm will face an horizonal AR and MR line corresponding to the market equilibrium price. In order to exist and make normal profit, a firm will therefore push costs down to the lowest average cost or leave the market, which is also the point where average cost will equal marginal cost and marginal revenue. This will result in allocative and productive efficiency and create an incentive for anyone with innovative ideas to temporarily push costs lower, making an abnormal profit. In the long run, however, since perfect knowledge and perfect information might exist in such circumstances, every supplier will copy the original breakout firm, and customers will gain more goods at a lower price because of the increase of supply. In this perspective, merger...

What are the benefits of price discrimination to UK railway passengers?     Price discrimination is where the same service is sold at different prices to the same or different consumers. It is divided into first-, second-, or third-degree discrimination.   For price discrimination to work, companies must have knowledge of demand, the ability to stop purchasers re-selling items or services at cheap prices to others, and the company should have market power to be able to set prices. Ideally, they should also be able to stop customer comparing prices and informing each other of significant differences.     In first degree discrimination, the price is tailored to the customer and their elasticity. All consumer surplus is captured. Such a system involves charging whatever a particular consumer can pay for a seat and is built into the way in which seats become more expensive the nearer to the time of travel a consumer seeks to purchase them. For railway comp...