3.3 Revenues, costs and profits Flashcards
What is a price maker/setter?
A firm that has sufficient market power to influence the price of the good it is selling and faces a downward sloping demand curve.
What is a price taker?
A firm that has to offer its product at the same price as everyone else.
What is total revenue (TR)?
The total amount of money a firm receives.
How is total revenue (TR) calculated?
TR = P X Q
What is revenue maximisation?
The output at which total revenue is at a maximum (price maker).
Draw a diagram of ‘total revenue’ (TR) for both price taking and making firms:
What is average revenue (AR)?
The price the firm receives per unit sold.
What is average revenue (AR) the same as?
The demand curve.
How is average revenue (AR) calculated?
AR = TR / Q
What is marginal revenue (MR)?
The change in total revenue from selling one more unit of output.
How is marginal revenue (MR) calculated?
MR = ∆TR / ∆Q
Draw a diagram of ‘marginal revenue’ (MR) and average revenue’ (AR) for both price taking and making firms:
What is total cost (TC)?
Refers to producing a given level of output
What is total fixed cost (TFC)?
Costs that do not change directly with output, e.g. rent paid for a factory building.
What is total variable cost (TVC)?
Costs that vary directly with output, e.g. variable prices of raw materials.
How is total cost (TC) calculated?
TC = TFC + TVC
How is total fixed cost (TFC) calculated?
TFC = TC -TVC