Cost, Revenue, Profit Theory Flashcards
Law of diminishing returns
After reaching an optimal production level, adding more of a production factor results in smaller output increases
Short run
Period of time in which at least one factor of production is fixed. All production takes place in the short run
Long run
The long run is when all production factors are variable, technology is fixed, and firms can adjust scale and size of production.
A firm
Organisation that brings together different factors of production (land, labor, capital, enterprise) to produce goods and services which is then hoped can be sold for a profit
Profit
TR - TC = Profit
Firms will want to produce that level of output where revenue > costs by the greatest amount
Economies of scale
decreasing costs per unit
Diseconomies of Scale
increasing costs per unit
Fixed costs (TC)
Cost that arise even when output is 0
Variable costs (VC)
Cost that vary with level of output
Total costs (TC)
Fixed Cost + Variable Cost
Average costs
the cost per unit of production/output (Can also look at AFC, AVC, and ATC)
Marginal cost
the addition to cost from producing an additional unit of output
Marginal cost (MC) formula
ᐃTC/ᐃq
Break even point
TR = TC
At this level of output, firms earn just enough to keep them in the market
Shut down point
- The price at which a firm is able to cover its variable costs in the short run so P = AVC, so it is only losing its fixed costs.
- P < AVC = shut down point
Normal Profit, Abnormal Profit, Loss Formula
Normal Profit: TR = TC or AR = AC
Abnormal Profit: TR > TC or AR > AC
Loss: TR < TC or AR < AC
Total revenue
total amount of money that a firm receives from selling a certain amount of a good or service in a given time period
TR = P x Q
Marginal revenue
the addition to revenue from selling an additional unit in a given time period
MR = ᐃTR/ᐃq
Normal profit
TR = TC
Profit maximization
- MR = MC
- Greatest positive difference between total revenue and total costs
- It is achieved by increasing total revenue or minimizing costs of production
Revenue maximization
It is greater than the profit maximising level of Q
where MR = 0
Market Share
a firm’s portion of total value of sales in a particular industry
Satisficing
A firm makes just enough profit to satisfy different stakeholders OR pursue other objectives OR because decision makers don’t have the necessary info in order to maximise profits
CSR
Corporate Social Responsibility - public interest decision making where firms employ an ethical code, focus on their impact on the workforce, consumers, local community, environment, etc. (e.g. fair trade)
Total Cost, Total Variable Cost, Total Fixed Cost Diagram
Diagram of Short Run AVC, AFC, MC
Economies of Scale Diagram
LRAC and SRAC curve
Average revenue
revenue earned per unit of sales
AR = TR/q
Revenue when price doesn’t change with output (PED =∞)
D=AR=MR
Revenue when price doesn’t change with output (PED =∞) + Marginal Cost
Revenue when price falls as output increases (downward sloping, PED falls(↓) as Q rises↑) + Explanation
Revenue Theory
- Total revenue (TR)
- Average revenue (AR)
- Marginal revenue (MR)
- Profit (or loss) = TR - TC
Cost Theory
- Fixed costs (TFC or FC)
- Variable costs (TVC or VC)
- Total costs (TC) = FC + VC
- Average cost (AC)
- Marginal cost (MC)
Profit Theory
Accountant:
Profit = TR - TC
Economist:
Profit = TR - economic cost (explicit and implicit)
Explicit Costs
any costs to a firm that involve the direct payment of money
Implicit Costs
The earnings a firm could have had if it had employed its factors in another use or if it had hired out or sold them to another firm.
e.g. opportunity costs, or factors that are already owned by the firm
Shut down and Break even price in diagram
Using diagram to show different profit and loss situation
