3.3 Revenues, Costs and Profits Flashcards
Total revenue
The total amount of money coming into the business through the sale of goods and services. quantity x price
Average revenue
Demand is equal to AR:
total revenue
———————
output
Marginal revenue
The extra revenue that the firm earns from selling one more unit of production: total revenue from ‘N’ goods- total revenue from (N-1) goods OR
change in total revenue
———————————–
change in output
Perfectly elastic demand curve
these are firms in perfect competition, a concept looked at in the next unit.
If marginal revenue is positive
when the firm sells the product at a lower price, total revenue still grows and so the demand curve is elastic. Up until output Q, the demand curve is elastic.
If marginal revenue is negative
Total revenue decreases as price decreases (or output increases) and so the
demand curve is inelastic. After output Q, the demand curve is inelastic.
When marginal revenue equals 0
TR is maximised and the demand curve is unitary elastic; this is at
point Q.
Cost in the short run
One factor of production is fixed and cannot be changed
Costs in the long run
all costs are variable
Total cost
The cost of producing a given level of output: fixed + variable costs
Total fixed cost
Costs that do not change with output and remain constant e.g. rent, machinery
Total variable cost
Costs that change directly with output e.g. materials
Average (total) cost
output
Average fixed cost
output
Average variable cost
output
Marginal cost
The extra cost of producing one extra unit of a good: total cost of producing N goods - total cost of producing (N-1) goods
change in total cost
——————————-
change in output
Law of diminshing marginal returns
If a factor of production is fixed, this will affect the business if it decides to expand. More workers can be added relatively easily and this will see an increase in production as machinery is used more efficiently. However, it will take a long time for the factory to expand and adding more labour will mean that they will have less and less impact on the amount produced as they get in the way and have no machines to use.
Diminishing marginal productivity
If a variable factor is increased when
another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit.
The relationship between short-run and long-run cost curves:
Short run average cost (SRAC) curves are U-Shaped because of the law of diminishing
returns whilst long run average cost (LRAC) curves are U-Shaped because of economies and diseconomies of scale.
Shifts and movement of the LRAC curve
- minimum level of average costs attainable at any given level of output.
- Change in output
Economics of Scale
when average costs begin to fall
Diseconomies of scale
when average cost begin to rise
Constant returns
where firms increase inputs and receive an increase in output
by the same percentage.
Minimum efficient scale
the minimum level of output needed for a business to fully exploit economies of scale. It is the point where the LRAC curve first levels off and when constant returns to scale is first met.
Internal economies of scale
- technical economies
- financial economies
- risk bearing economies
- managerial economies
- purchasing economies
examples of technical economies
- specialisation
- balanced teams of machines
- increased dimensions
- indivisibilty of capital
- research and development
examples of marketing and purchasing economies
- buying in bulk
- specialisation
- distribution
external economies of scale
- better universities
- road infrastructure
- communication networks
- highly skilled population
Diseconomies of scale
- workers
- geography
- change
- price of materials
- management
ways to solve diseconomies of scale
- enter into smaller groups
- hire a maintence team
- provide incentives to workers
what is profit
The difference between revenue and costs.
Condition for profit maximisation.
- when TR and TC are furhest apart
- MC=MR
Normal profit
return that is sufficient to keep the factors of production committed to the business
Supernormal profit
Profit achieved in excess of normal
Loss
where the firm fails to cover its costs
When should firms still produce?
As long as the average cost is covered
if AVC>AR what should firms do
continue to produce
if AVC<AR what should firms do
leave the industry
In the long turn what should firms do
they need to make at least normal profit
