3.3 Revenue, cost and profit Flashcards
What is the calculation for profit?
Profit = revenue - costs
Define normal profit
Amount of profit that the firm could have made if the resources used in production were used to make the next best available option
What is abnormal profit?
Any profit over normal profit, where TR > TC
Where does profit maximisation take place, and why?
Where MC = MR
Because firms will sell until the extra revenue = extra cost - there is no more additional profit to be made
What happens to the equilibrium on a cost/revenue diagram if fixed cost changes?
Stays the same
(ATC changes but not MC)
What happens to the equilibrium on a cost/revenue diagram if variable cost changes?
New equilibrium
(both MC and ATC change)
Define the shut-down position, and where it occurs on a diagram in short run
When a firm cannot cover variable costs in the short run
Where AVC = AR
What must happen to costs in the long run?
All costs (variable and fixed) must be covered in the long run - firms must make at least normal profit
What does one firm making abnormal profit in a perfectly competitive market signal to other firms, and what will happen in the long run to this abnormal profit?
That they should enter the market
In the long run the firm will be competed out and will return to normal profit
Do perfectly competitive firms have allocative efficiency in the short run, long run, or both?
Both
Do perfectly competitive firms have productive efficiency in the short run, long run, or both?
Long run
Define allocative efficiency, and say where this occurs on a cost/revenue diagram
Markets use scarce resources to make the products and provide the services that society demands and desires.
Where P = MC
Define productive efficiency and say where this occurs on a cost-revenue diagram
Producing at lowest ATC - where ATC meets MC
Total revenue formula
P x Q
Average revenue per unit sold
TR/Q, if all same price then AR=P
