3.3 Flashcards
total revenue
The total amount of money coming into the business through the sale of goods and services.
Formula:
𝑇𝑅=Quantity×Price
average revenue
The revenue earned per unit of output.
marginal revenue
The extra revenue earned from selling one more unit of production.
Price Elasticity of Demand (Perfectly Elastic)
Characteristics: Firms in perfect competition experience a perfectly elastic demand curve (horizontal). They have no price-setting power, so MR = AR = D.
Price Elasticity of Demand (Downward Sloping)
Characteristics: Most goods have a downward sloping demand curve, indicating some price-setting power. The firm’s AR curve shows the price consumers are willing to pay for each quantity sold.
economic cost of production
The opportunity cost of production; the value that could have been generated using resources in their next best use.
Short Run vs. Long Run Costs
Short Run: At least one factor of production is fixed.
Long Run: All factors of production are variable.
Law of Diminishing Returns
Adding more of a variable factor to a fixed factor will eventually yield lower per-unit returns, increasing the marginal cost.
Graphical Representation: U-shaped curves for ATC, AVC, and MC.
minimum efficient scale
Definition: The minimum level of output needed to fully exploit economies of scale. the point where the LRAC curve first levels off and when constant returns to scale are first met
Long Run Average Cost (LRAC) Curve
Shape: U-shaped due to economies and diseconomies of scale.
economies of scale
the cost advantages firms gain from increasing their output
Types: Technical, financial, risk-bearing, managerial, marketing, and purchasing economies.
diseconomies of scale
Coordination and control issues, communication problems, and increasing raw material prices.
Profit Types and Conditions
Normal Profit: Return sufficient to keep factors of production in the business.
Supernormal Profit: Profit above normal profit.
Loss: When total revenue is less than total costs.
Shutdown Points
Short Run: Continue production if AR > AVC to cover variable costs.
Long Run: Must earn at least normal profit to stay in the industry.
