costs and revenues Flashcards
what is a fixed cost
a cost that doesnt change with output in the short run
what is a variable cost
a cost that changes with output
what is average cost
the cost per unit produced
how to calculate average cost
total costs / units produced
what is marginal cost
the extra cost incurred as a result of producing the final unit of output, only affected by variable costs
how to calculate marginal cost
change in total cost / change in quantity
explain the shape of AC
decreases initially due to economies of scale, then increases due to law of diminishing returns
when is average cost lowest and explain what happens either side
when MC = AC
when MC is lower, then average cost is falling because each extra unit is smaller than average cost and so adding it on will decrease average cost further
when MC is higher, average cost is rising because each extra unit is more than the average and so when you add it on it increases the average
what is the law of diminishing returns
if one variable factor of production is increased while the others stay fixed, eventually the marginal returns from the variable factor will begin to decrease
how to calculate total revenue
quantity x price
how to calculate average revenue
total revenue / quantity sold
what is marginal revenue
the extra revenue received as a result of selling the final unit of output
relationship between AR and MR when perfectly elastic
AR = MR
PED at midpoint and either end of demand curve
midpoint = (-)1
left - PED>1 very top = infinity = elastic
right - 0
what is MR when TR is maximised
0