09 Costs & Revenues Flashcards
Define the Short-Run.
When at least one factor of production is fixed, while others are variable.
Define the Long-Run.
When all factors of production and costs are variable.
Which factor inputs are fixed or variable?
Capital - fixed
Land - fixed
Raw materials - variable
Labour - variable
What is a variable factor input?
A factor that varies, due to a change in output.
What is a fixed factor input?
A factor that remains fixed, regardless of a change in output.
What are all factor inputs in the long run?
Variable.
How could a producer increase capacity?
- By moving into a larger factory
- Buying new machinery
- Increasing labour
- Using more raw materials
How are total costs or revenue calculated?
Fixed (costs or revenue) + variable (costs or revenue)
How are average costs or revenue calculated?
Total costs (or revenue)/output
How are marginal costs or revenue calculated?
Change in total costs (or total revenue)/change in output
Define the Law of Diminishing Return (LoDR)
As more of a variable FoP (e.g. Labour) is added to a fixed FoP (e.g. capital), the marginal product of labour will initially rise but eventually fall, thus raising marginal costs.
MC < AC =
AC Decrease.
MC > AC =
AC Increase.
MC = AC =
No change.
What is the equation for Marginal Product?
Change total product/change in labour
What is the equation for Average Product?
Total product/Labour
Define fixed cost.
Costs that do not change with output, but can change year to year.
Define variable cost.
Costs that change depending on output.
Give examples of fixed costs.
- Machinery
- Rents on business premises
- Buildings insurance
- Quarterly heating and lighting bills
- Salaries of senior staff
- Annual marketing and advertising budget
Give examples of variable costs.
- Wages
- Working capital
- Commission
- Raw materials
- Packaging and postage
- Piece-rate
- Fuel for delivery vehicles
- Distribution costs
What is the equation for AFC?
TFC/output
What is the equation for TVC?
VC per unit x output
What is the equation for AVC?
TVC/output
Define revenue.
The inflow of money into a firm.
What is the equation for TR?
Price x Quantity
Define sales.
Transaction between a buyer and seller, in which the seller gains revenue.
What should firms do to increase sales?
Decrease prices.
What is the equation for Marginal Revenue?
Change in TR/Change in total output
Where is TR maximised?
Where PED is -1 (unitary).
What is the equation for Average Revenue?
TR/output
What is the equation for Marginal Revenue?
Change in TR/Change in output
What happens to TR if demand is responsive, and price is decreased?
Firms will experience a rise in TR if price is decreased because sales have increased significantly.
What happens to TR if demand is unresponsive, and price is decreased?
Firms will experience a fall in TR if price is decreased, because sales have dropped due to inelastic demand.
What is Average Revenue curve, on a diagram, and what does it show?
It is the price and shows that demand curve.
When on a MR diagram is revenue maximised?
When MR intersects with 0.
When does MC rise?
When the Law of Diminishing Return comes into effect.
Define increasing returns to scale.
Where a charge in inputs leads to a more than proportional change in output.
Define decreasing returns to scale.
Where a change in inputs leads to a less than proportional change in output.
Define constant returns to scale.
Where a change in inputs leads to a unitary change in output.
Define the minimum efficient scale.
Where productive efficiency is achieved at the lowest possible output.
Increasing RTS is also known as…
Economies of Scale.
Decreasing RTS is also known as…
Diseconomies of Scale.
