3.3 Revenues, Costs and Profits Flashcards
What is revenue?
The money earned from the sale of goods and services
What is total revenue?
Quantity sold X Price sold at
What is average revenue?
Average Revenue is equal to demand. It is TR/Q
What is marginal revenue?
The additional revenue earned by a firm for producing one extra unit of a good or service
If a firm is a price taker, what does this say about their revenue curves?
They are equal and perfectly horizontal, price is perfectly elastic
If a firm is a price maker, what do their revenue curves look like?
MR is twice as steep as their AR line and they both slope downwards. This is because there is some degree of price setting power in the market
What does the TR curve look like?
An upside down U because until MR = 0 it will slope up and at MR=0 it has its turning point and then is symmetrical
What is economic cost?
This is the opportunity cost of production
What is total costs?
Fixed costs + Variable costs
What are fixed costs?
Costs which remain constant regardless of the level of production
What are variable costs?
Costs which change as output increases
What is marginal costs?
The cost of producing one additional unit of a good or a service
Why are all the cost curves U-Shaped?
The law of diminishing marginal productivity
What is the law of diminishing marginal productivity?
Hiring additional units of labour will increase productivity until a certain point, from which after this point additional workers will lead to a fall in productivity. This is because if you keep adding workers in the same warehouse. eventually it will get too crowded and it will affect their productivity.
What causes a shift and what causes a movement along the LRAC curve?
A change in output or internal economies of scale causes a movement along the curve but external economies of scale causes a shift in the LRAC curve
What is economies and diseconomies of scale?
Economies is when an increase in output causes a fall in the LRAC but diseconomies is when an increase in output leads to a rise in LRAC
What is constant returns to scale?
This when an increase in output has no effect on LRAC
What is the minimum efficient scale?
The minimum level of output required too fully exploit economies of scale.
What are the 6 internal economies of scale?
Purchasing
Marketing
Managerial
Financial
Risk Bearing
Technical
What are the types of external economies of scale?
Workers want to work for bigger firms
Central Business Districts arise such as Silicon Valley
Less training costs as workers are trained by other firms
They have more access to support staff because they are in the same region so less transport and admin costs
What are the 4 types of diseconomies of scale?
Communication
Coordination
Control
Motivation
What is a firms shut down point in the short run?
When it has a negative contribution towards its fixed costs, AVC>AR
What is a firms shut down point in the long run?
When it makes less then normal profit AC>AR
