costs Flashcards
How do you calculate totalrevenue?
Price x quantity sold
Marginal revenue
The extra revenue a firm earns from the sale of one extra unit. When marginal revenue us 0, total revenue is maximised.
Where on a diagram is marginal revenue shown?
MR = 0 on the revenue diagram directly below the midpoint of the AR curve.
Average revenue
The average receipt per unit. TR / quantity sold AKA The price each unit is sold for.
What does the AR curve look like in markets when firms are price makers?
The AR curve us downward sloping.
How do you calculate total cost?
Total costs = Total variable costs + total fixed costs
How do you calculate average total costs
total costs / quantity produced
How do you calculate average fixed costs
total fixed costs / quantity
How do you calculate average variable costs
total variable costs / quantity
Marginal costs
How much it costs to produce one extra unit. Change in TC / Change in Quantity
The law of diminishing marginal productivity
Adding more units of a variable input to a fixed input, increases output at first.
However, after a certain number of inputs are added, the marginal increase of output becomes constant.
Then, when there is an even greater input, the marginal increase in output starts to fall.
Draw a diagram to show the relationship between Short run and long run average cost curves.
The lowest point is the minimum efficient scale. This is where the optimum level of output is since costs are lowest.
What are the 6 different types of internal economies of scale?
Purchasing - discount bulk buying
Fianacing - rising money/borrowing
Marketing - advertisment
Managerial - account - HR - marketing team
Technical - capital - operational
External economies of scale
Deregulation - lower administration
Transport cost - roads
Technology - apple pay
External economies of scale
2
These occur within an industry when it gets larger. Eg local roads might be improved, so transport costs for the local industries will also fall. Also there might be more training facilities or more research and development, which will also lower average costs for firms in the local area.
What are the 3 types of diseconomies of scale?
Control- becomes harder to monitor how productive the workforce is, as the firm becomes larger.
Coordination- It is harder and complicated to coordinate every worker, when there are thousands of employees.
Communication- Workers may start to feel alienated and excluded as the firm grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation
Normal profit
The minimum reward required to keep entrepreneurs supplying their enterprise in the long run. It covers the opportunity cost of investing funds in the the firm and not elsewhere.
Supernormal profits
The profit above normal profits. This exceeds the value of opportunity cost of investing funds into the firm. When TR > TC
When might a firm choose to continue operating in the short run?
P > AVC
AP > AVC
Short run
at least one factor of production is fixed
Long run
no factors of production are fixed they are all variable
Law of diminishing marginal return
adding an additional factor of production results in smaller increases in output
Marginal cost
the extra cost for producing an extra good
FC - fixed costs
examples
Rent
Salaris
Loan
Utilies - most
VC - variable cost
examples
External music teacher
Bus lehanes
Wage
Explain the concept of diminishing marginal productivity and the impact it has on marginal cost ?
When a firm continues to add more variable factors to a fixed factor (1 mark) marginal productivity (or marginal product) will eventually fall (1 mark).
This means marginal cost will rise (1 mark), which is the cost of producing an additional unit (1 mark).
Explain the relationship between the marginal cost curve and average cost curve
MC will decrease until the LDMR and then start to rise. Average cost continues to decrease until it intersects with the marginal cost. Note average cost can continue to decrease as marginal cost rises
A firm increases the output in the short run to meet increase demand
How does it do this ? You can increase variable inputs/ in some cases labour
What has happened to its fixed cost? Stayed the same
Short run
at least one factor of production is fixed
Long run
no factors of production are fixed they are all variable
Business three objectives
Profit - MC = MR
Sales - AR = AC
Revenue - MR = 0
What is meant by economics of scale?
As you increase production so the average cost of producing per unit will fall or decrease until you hit your Mes point
what does fixed cost impact
fixed cost only impacts ac
what is the relationshi[ between fixed costs and MC
fixed costs don’t change where as marginal cost varies with output therefore there is no relationship
economics of scale is only used in
average cost
the law of marginal product
it is a refection
when don’t you close
when your revenue curves my fixed cost I continue to operate
suck cost
is a cost you can’t get back
when you can cover your average vairable cost
you can cover your fixed cost
When might a firm choose to continue operating in the short run?
P > AVC
What is the short run shut down price?
When variable costs cannot be covered. This is at the lowest point of the AVC curve. P < AVC.
What is the long run shut down price?
TR < TC
what is normal profit
AR = AC
