3.3 Revenue, Costs and Profits Flashcards
What is total revenue & formula?
Total revenue is the total value of sales a firm incurs.
TR = PxQ
What is average revenue?
Average revenue is the overall revenue per unit.
AR = TR/Q
What is marginal revenue or formula?
Marginal revenue is the extra revenue received from the sale of an additional output.
MR = ΔTR/ΔQ
What is the relationship between TR, AR & MR in perf comp?
Firms are price takers; price is constant
Marginal revenue is same for all extra unit
MR=AR=D
TR curve upwards sloping as prices are constant; more good sold, higher revenue
How does the costs/revenue graph of a firm in imperfect competition look like?
AR/MR is downwards sloping
- Price decreases as output increases
MR=0 halfway through AR
- MR falls twice as much as AR
TR is a u-shape
- TR is initially increasing; once MR=0; TR starts falling
What is fixed costs?
Costs that do not change as the level of output changes.
What is variable costs?
Variable costs are costs that vary directly with output.
What is marginal costs?
Marginal cost is the cost of producing an additional unit of output.
Formula for
- Total variable cost
- Average total costs
- Average fixed costs
- Average variable costs
- Marginal costs
Total variable cost
- variable cost x quantity
Average total costs
- Total cost/quantity
Average fixed costs
- fixed costs/quantity
Average variable costs
- variable costs/quantity
Marginal costs
- ΔTC/ΔQ
What is the Short/long-run?
Short run is when only one factor of production is variable e.g labour.
Long run is when all FoPs are variable.
What is marginal product of labour?
Marginal product of labour is
- the change in output resulted from an additional unit of labour
What is law of diminishing marginal productivity?
Law of diminishing marginal utility is when
- initially productivity increases as labour increases
- after certain point, additional labour decreases productivity due to constraints of other FoPs
What is economies of scale?
EofS is when a firm decreases LRAC as output increases due to benefits it receives.
What is increasing returns to scale?
Increasing returns to scale is when increase in input results in larger than proportional increase in output.
What is diseconomies of scale?
DEofS is when a firm continues increasing its output in LR and it’s LRAC increases.
What are the 6 types of Internal EofS?
- Risk-Bearing economies
- Financial Economies
- Managerial Economies
- Technical Economies
- Marketing Economies
- Purchasing Economies
What is Risk-bearing economies EofS?
When large firms are able to operate in variety of markets; if one area of business fails, their firm won’t collapse
What is financial economies EofS?
Large firms have greater assets/security; lower risk; can negotiate lower interest rates; cost increase but Q increase faster.
What is managerial economies EofS?
Employ specialist manager; more efficient in certain tasks; lower AC
Managers in smaller firms have to fulfill multiple roles; decreases efficiency
What is technical economies EofS?
Improvements in the production process
- Specialisation of workers
- Specialist machinery; larger firms able to buy machinery for each stage of production;
- Increased dimensions
- R&D; larger firms able to gain advantage over competitors.
What is marketing economies EofS?
- Bulk-buy advertisement; negotiate better rate of unit advertising; cost spread over higher quantity
What is purchasing economies EofS?
- Bulk-buying; firms buy raw materials in larger quantity; suppliers offer discount per unit; spread cost over wider range of output
What are the 3 types of external EofS?
- Better transport infrastructure
- Component suppliers move closer
- R&D firms move closer
How does better infrastructure result in EofS?
Larger firms attract better infrastructure around it; cheaper to access raw materials and transport; total cost decrease.
What are 4 types of DEofS?
- Control
- Communication
- Coordination
- Motivation
How can control cause DEofS?
Harder to control workforce of larger firm; workers may slack off; impact productivity; Q decrease.
How can communication cause DEofS?
Harder to spread messages through larger firms; takes time; impact on productivity
How can coordination cause DEofS?
Coordinating between different business parts gets difficult as firm gets larger; poorer quality work; productivity suffers
How can de-motivation cause DEofS?
In large firms, workers may feel less value and they are easily replaced. Hits their motivation; work less efficient; worse quality; productivity decreases
What is minimum efficient scale?
Minimum efficient scale is the lowest cost point on LRAC; level of output where EofS is fully exploited.
What is constant scales to return?
Output increases but AC stays same.
What are conditions for profit maximisation?
MC=MR
What are the 3 different types of profit?
Normal profit
- a return which is sufficient to keep FoPs running.
Supernormal profit
- When profit is greater than normal profit
Subnormal Profit
- Loss where firm fails to cover costs
What is the shutdown point in the LR?
AVC>AR; producing more goods will increase the loss
Why do firms continue to produce at a loss if AVC<AR?
Each good they make will generate more revenue (AR) than it cost for them to make (AVC); continue of production covers some of the fixed costs
What is the shutdown point for firms in the short run?
AVC=AR; should produce as long as revenue covers variable cost.
