3.3.1, 3.3.2, 3.3.3, 3.3.4 Revenues, costs and profits Flashcards
3.3.1 Revenue, 3.3.2 Costs, 3.3.3 Economies and diseconomies of scale, 3.3.4 Normal profits, supernormal profits and losses
Define total revenue
The amount of money firms receive from selling their goods/services
TR = P x Q
Total revenue = price x quantity
Define average revenue
The amount of money firms receive from selling one unit of output (selling price)
AR = TR/Q = P
Average revenue = total revenue/quantity = price
Define marginal revenue
The change in total revenue from selling one extra unit of output
MR = ∆TR/∆Q
Marginal revenue = change in total revenue/change in quantity
Price taker
Perfectly elastic demand curve:
No power to control the price it sells at(have to accept the price set by the market)
Price maker
Downward sloping demand curve:
Have some power to set the price they sell at - to increase sales the firm must reduce the price
Define (total) fixed costs
(T)FC:
Costs that do not vary directly with the amount of output (exist even when output = 0)
Define (total) variable costs
(T)VC:
Costs that vary directly with the amount of output (e.g. raw materials and packaging)
Total cost formulae
TC = TFC + TVC
Total costs = total fixed costs + total variable costs
Average (total) cost formulae
ATC = TC/Q
Average total costs = total costs/quantity
Average fixed cost formulae
AFC = TFC/Q
Average fixed costs = total fixed costs/quantity
Average variable cost formulae
AVC = TVC/Q
Average variable costs = total variable costs/quantity
Define marginal costs
The increase in total cost as a result of increasing total output by one unit
MC = ∆TC/∆Q
Marginal costs = change in total costs/change in quantity
Define the short-run
The period of time when at least one factor of production is fixed (e.g. fixed no. of machines/skilled workers/size of building)
Define the long-run
The period of time when the capacity/size/scale of the firm can be increased or decreased (factors of production are variable)
