EconomicsNotes

  Profit is a positive difference between revenue and cost. Firms maximise profit where they neither make nor lose money on the last item produced and sold. This is the level of production where marginal cost is equal to marginal revenue. The actual amount of profit in such circumstances will be defined by the difference between average cost and average revenue at that level of production.   Economics also makes a distinction between normal, break-even, and abnormal (sometimes called supernormal) profits. Normal profit is the level of profit at which a firm covers its opportunity cost, usually defined as what it could have earned by doing something else with its money in the same time period. Break-even is an accounting concept in which a firm’s revenues are equal to its costs and is usually treated as the same thing as normal profit by economists. Abnormal profit is what most people understand as profit, which is a surplus of cash over spending. Economic theory does not a...

  A perfect market is one in which an homogenous product is freely traded to sovereign consumers. Perfect knowledge and perfect information exist, so that all sellers, of whom there are many, know the production and sales techniques of all others and can replicate them, and all consumers know where they can always obtain the cheapest products. There are no legal, supply chain, or cost barriers to entry or exit into the market, and consumers are completely elastic, so that average revenue is equal to marginal revenue at the equilibrium price. The price is set purely by the meeting of supply and demand. In such circumstances, normal economic rules apply. Consumers would be seeking to maximise their utility and producers would be seeking to maximise their profits. Profit is the difference between revenue and cost and is maximised where marginal revenue is equal to marginal cost. This means that in a perfect market all profits are normal profits. Firms will only operate to cover oppo...

    Defining a large business is not easy. Vladimir Lenin, who is not usually viewed as a business guru, did it by default when he wrote that a small business employed five people or fewer. [1] Most economists would point to a variety of metrics, including market share, capitalisation, the overall value of assets or profits, or both, or turnover. Economists argue that businesses want to grow however. This is because larger businesses benefit from economies of scale, either physically, internally, or externally. Larger businesses are thought able to lower long run average costs (LRAC) to their lowest point, the minimum efficient scale (MES), and can hold them there across a range of output. This means that they can ‘stretch out’ the moment of lowest LRAC. Eventually, diseconomies of scale set in as the business gets too big. There are too many managers, or company structures are too complicated, or the business is complacent and develops x-inefficiency and y-inefficiency...

    A firm is an economic entity engaged in business. Economic theory assumes that the firm, like the consumer, maximises its self-interest. This self interest is however the product of the interplay of market structure, business organisation, and chosen or required objective. So, for instance, some firms might choose to profit-maximise, some to profit satisfy, some to revenue maximise, and some to sales-maximise, or even engage in loss-leading predatory behaviours. Oligopoly firms might take their cue from other firms, and find that price-maximisation is only really possible if they can join a cartel; imperfectly competitive firms might sustain a loss in the short run, covering their variable costs and making a contribution to fixed ones, if they think that this will lead to ultimate survival in a temporarily tough market. These decisions often relate to the nature of the firms. A sole trader’s objective, for instance, may include the freedom and control that working for on...