2.E.THE THEORY OF THE FIRM 1: PRODUCTION, COSTS, REVENUES, AND PROFIT HL
Production and costs (HL):
- Distinguish between the short run and long run in the context of production.
- Define total product, average product and marginal product, and construct diagrams to show their relationship.
- Explain the law of diminishing returns.
- Calculate total, average and marginal product from a set of data and/or diagrams.
- Explain the meaning of economic costs as the opportunity cost of all resources employed by the firm (including entrepreneurship).
- Distinguish between explicit costs and implicit costs as the two components of economic costs.
- Explain the distinction between the short run and the long run, with reference to fixed factors and variable factors.
- Distinguish between total costs, marginal costs and average costs.
- Draw diagrams illustrating the relationship between marginal costs and average costs, and explain the connection with production in the short run.
- Explain the relationship between the product curves (average product and marginal product) and the cost curves (average variable cost and marginal cost), with reference to the law of diminishing returns.
- Calculate total fixed costs, total variable costs, total costs, average fixed costs, average variable costs, average total costs and marginal costs from a set of data and/or diagrams.
- Distinguish between increasing returns to scale, decreasing returns to scale and constant returns to scale.
- Outline the relationship between short-run average costs and long-run average costs.
- Explain, using a diagram, the reason for the shape of the long-run average total cost curve.
- Describe factors giving rise to economies of scale, including specialisation, efficiency, marketing and indivisibilities.
- Describe factors giving rise to diseconomies of scale, including problems of coordination and communication.
- Distinguish between total revenue, average revenue and marginal revenue.
- Draw diagrams illustrating the relationship between total revenue, average revenue and marginal revenue.
- Calculate total revenue, average revenue and marginal revenue from a set of data and/or diagrams.
- Describe economic profit (abnormal profit) as the case where the total revenue exceeds the economic cost.
- Describe normal profit (zero economic profit) as the case where total revenue is equal to total economic costs or the situation in which the amount of revenue earned is just sufficient to keep the firm in its current line of business.
- Explain that economic profit (abnormal profit) is profit over and above normal profit (zero economic profit), and that the firm earns a normal profit when economic profit (abnormal profit) is zero.
- Explain why a firm will continue to operate even when it earns zero economic profit (abnormal profit).
- Explain the meaning of loss as negative economic profit arising when total revenue is less than total cost.
- Calculate different profit levels from a set of data and/or diagrams.
MOTIVATIONS OF FIRMS: THE LIMITS OF PROFITS
School economics: The limits of the pursuit of profit
Specification: Objectives of firms Click to read the article below and then answer the questions: With reference to the article, and your own knowledge, to what extent is profit maximisation the sole objective of firms? Get alerts on FT Secondary Schools when a new story is published Copyright The Financial Times Limited 2019.
THE BENEFITS OF TRADE AND THE DIVISION OF LABOUR
REFERENCE DIAGRAMS
