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
Define marginal revenue
The additional revenue from selling an extra item
Define short run and long run
• Short run = when one or more factors of production are fixed
• Long run = when all factors of production are variable
define law of diminishing returns
Eventually marginal product of a variable input will decline
Total cost formula
TFC + TVC
AVERAGE variable cost formula and average fixed cost formula and average total cost formula
TVC/output
TFC/output
TC/output
Marginal cost formula
Change in TC/Change in output
Define increasing returns to scale
if all factors of production are doubled, output more than doubles
define decreasing returns of scale
if all factors of production are doubled, output less than doubles
define constant returns to scale
if all factors of production are doubled, output doubles,
Define minimum efficient scale
lowest level of output at which Long Run Average Costs are minimised
Name the 6 internal economies of scale
Purchasing
Technical
Managerial
Marketing
Financial
Risk-bearing
Name 3 internal diseconomies of scale
Communication
Coordination
Motivation
Name 4 external economies of scale
Infrastructure
Research
Experience and expertise
Logistics (close to other firms in supply chain)
Name 2 external diseconomies of scale
Scarcity of raw material
Time lags and skills shortages
define economies of scope
it is cheaper to produce a range of products rather than specialising in a few
