3.3 Revenues, costs & profits Flashcards
Equation and definition of marginal revenue
MR= ∆ in TR / ∆ in Q
An addition to revenue of selling an additional unit of output
Equation for average revenue
AR= TR/Q = QXP/ Q = AR=P
represents D curve
2 marks
Explain why average fixed costs fall consistently as output increases.
- Average fixed costs are derived by dividing total fixed costs by the quantity of output.
- Average fixed costs fall consistently as output increases because, in the short run, fixed costs remain constant. Therefore calculating average fixed costs involves dividing a fixed number by an increasing number which will lead to consistently decreasing answer
Equation and definintion of total revenue
TR= quantity x price
Income a firm derives from selling a given quantity of a G/S at a particular price
Explain the revenue curve in perfect competition
- Perfectly elastic demand so AR=MR=D given revenue recieved by the firm for a G/S is constant
- TR = upward sloping as P’s are constant & so the more G/S sold= higher revenues made
Each firm can sell all of its output at the current market price
Perfect competition characteristics
- Many buyers and sellers (infinite)
- Homogenous goods = price takers
- No barriers to entry or exit
- Perfect infomation
Explain the revenue curve in imperfect competition
- Downward sloping D curve
- TR is maximised when MR=0
- Price falls as output increases
- When MR>0: each additional unit sold adds to TR
- After this point= negative MR so TR falls
Elasticity of curved is linked to MR so if MR is postive, negative or 0 what happens?
-
Positive: ↓P and ↑ output = D curve is elastic
Up until output Q, D curve = Elastic - Negative: TR ↓ as P↓ or Q ↑ so after point Q, D curve = Inelastic
- MR=0: TR is maximised, D curve= unitary elastic at point Q so PED=1
Imperfect competition characteristics
- Few buyers and sellers
- Differentiated G/S= price makers
- High barriers to entry or exit
- Imperfect infomation
Why does average fixed costs decrease when marginal costs are greater than average costs (MC>AC)
Fixed costs decrease as they are spread out over a larger output
Formula for profit
Profit = Total revenue - Total costs
3 marks
Explain one condition under which loss-making firms might continue to operate in the short run
- Short run shut down point where AR=AVC
- AR>AVC in short run so continues to operate at loss
- But each additional unit sold contributes to reducing the size of the losses
Explain the difference between variable costs and fixed costs
- Fixed costs= remain the same as output increases or decrease
- Variable costs= Vary directly with output
Define marginal product of labour (MP)
The change in output that results from an additional unit of labour
What is law of diminishing returns
In the short run, when variable FoP (labour) are added to a stock of fixed FoP (capital), total marginal product will initially rise then fall.
This is because a firm will reach a point where it has a disproportionate quantity of labour to capital and so the marginal product of labour will fall, thus raising marginal costs.
Define economies of scale
Occurs when theres a fall in ATC as the scale of production increases
Define diseconomies of scale
Occurs when theres a rise in ATC as the scale of production increases
E.O.S
What is purchasing economies
Discount for bulk buying
The larger the firm, the more likely it is able to buy raw materials in bulk
What is technical economies
Use of specialist, often expensive capital e.g. machinery
Increases competitivness, able to spread FC over greater ouput
What is managerial economies
Occurs when large firms can afford specialists
Specialist labour e.g. accountants, lawyers (division of labour)
Better qualified, more experienced, more efficient
What is financial economies
Better credit rating as large firms are seen as less likely to fail and can borrow £ at a low I.R. = low AC
Cost of financing investment is lower
Define minimum efficient scale (MES)
Is that scale of production where the LRAC is at it lowest point
Explain how internal E.O.S lead to returns of scale
The source of internal E.O.S like better machinery and technology (technical E.O.S) leads to a greater % output than % input, leading to returns of scale, so fixed costs are spread between more output. Fixed costs per unit fall.
