3.3 Revenues, costs and profits Flashcards
what is the law of diminishing returns
as increasing quantities of a variable factor are applied to a fixed factor, there comes a point where marginal productivity falls
define fixed costs
don’t change with output
define sunk costs
irretrievable cost which cannot be retrieved if the firm leaves the market
define variable costs
costs depending on the level of output
total cost formula
fixed costs + variable costs
total variable cost formula
average variable cost x output
average total cost formula
total cost/output
average fixed cost formula
total fixed cost/output
average variable cost formula
total variable cost/output
marginal cost formula
change in total cost/ change in output
how do economists and accountants differ in their approach to costs
ECON - opportunity cost is a cost
ACCOUNT - do not include opp. cost
why does MVC = MC
- MFC is always 0
- MC = MFC + MVC
- => MC = MVC
why are TC and TVC parallel
- FC do not change
- => vertical distance between the lines remain constant
why does MC cross AC at its minimum
- where MC < AC, each additional unit pulls AC down
- where MC > AC, each additional unit pulls AC up
- => where MC = AC, is a minimum
what is MES
minimum efficient scale (productive efficiency) - the lowest point on a cost curve at which a company can produce its good at the lowest possible unit cost ( where E of S have been fully exploited)
what does a flat LRATC curve mean
some industries lack significant economies or diseconomies of scale. firms or plants of many different sizes can exist within the same industry
what does an L-shaped LRATC curve mean
beyond MES, no further economies of scale are possible but there are no diseconomies of scale, size of a firm is limited by market constraints
total revenue formula
output x price
average revenue formula
price = total revenue/quantity
what is the AR curve otherwise known as
demand curve
marginal revenue formula
change in total revenue/change in output
what happens when TR is maximised and why
- PED becomes inelastic
- MR becomes negative
since PED is inelastic, as price increases, TR starts to decrease. at this point, MR becomes negative because these additional units take away from TR, hence TR is falling
revenue: PED > 1…
- price elasticity decreases
- increase in TR
revenue: PED < 1
- price inelasticity increases
- fall in TR
revenue: PED = 1
- TR = MAX
- MR = 0
revenue: link between gradient of AR and MR
Mmr = 2 x Mar
revenue: link between output levels of AR and MR
Qar = 2 x Qmr
define ‘normal profit’
it is the maximum payment needed to keep them in business; the opp. cost of their time & risks (AR = AC)
define supernormal profit
otherwise known as economic profit, abnormal profit & π
- revenue - economic costs
(AR > AC)
when is there a loss in profit
AR < AC
when is profit maximisation
MC = MR
- when MC < MR each additional unit increases profit (incentive to increase output)
- when MC > MR each additional unit decreases profit (incentive to decrease output)
when is sales maximisation
AC = AR
define sales maximisation
the greatest amount of sales before a loss as you’re covering average costs
what is the aim of sales max
increase market share
who benefits from profit max
shareholders/owners
who benefits from revenue max
- brand loyalty
- e of s
