Costs and Revenues Flashcards
What do firms face in the short run and explain
Limited Flexibility
Varying the quantity of labour is easy - but varying the amount of capital is difficult
What is labour seen as in the short run
A Flexible Factor
What is capital seen as in the long run
A Fixed Factor
Define the short run
The period over which the firm is free to vary the input of variable factors
What is a firm able to do in the long run
Vary inputs of both variable and fixed factors
What will determine the way in which output varies with quantities of inputs and what is certain
The nature of technology in the industry
If the firm increases the number of inputs of the variable factor (labour) while holding constant the input of the other factor (capital), it will gradually derive less additional output per unit of labour for each further increase - law of diminishing returns
What will determine the way in which output varies with quantities of inputs and what is certain
The nature of technology in the industry
If the firm increases the amount of inputs of the variable factor while holding constant the input of the other factor - it will gradually derive less additional output per unit of labour for each further increase - law of diminishing returns
What is the law of diminishing returns
A short run concept as it relies on the assumption that capital is fixed
If the firm increases the amount of inputs of the variable factor while holding constant the input of the other factor - it will gradually derive less additional output per unit of labour for each further increase
How may costs be regarded in the short run
Fixed and variable
What are sunk costs
Fixed costs that a firm cannot avoid paying even if it chooses to produce no output
What are variable costs
Operating costs
Total costs formula
Total costs = total fixed costs + total variable costs
When will total costs increase and why
As the firm increases the volume of production
More of the variable input is needed to increase output
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Costs in the long run
A firm is likely to choose the level of capital that is appropriate for the level of output that it expects to produce - due to a firm being able to vary both capital and labour
How is average fixed cost calculated
Fixed costs / Output
What happens to AFC as output increases
Will always continue to fall because fixed cost is being spread across a greater output
Average Variable Cost formula
Variable Costs / Output
How is Average Cost / Average Total Cost calculated
AFC + AVC
or
Total Cost / Quantity Produced
What is Marginal Cost
Change in total costs when one additional unit of output is produced
Gradient of the total cost curve
Where does Marginal Cost always go through
The minimum point of the average variable cost and average total cost curves
What must occur if marginal cost is greater than the average cost
Average cost must be rising
When is the only time that average cost is not falling or rising
When marginal cost = average cost
AND
the average has stopped falling and has yet to start rising
Define Revenue
Payments firms receive when they sell the good and services they produce over a given time period
Firms total revenue formula
Price x Quantity Sold
What is a firms marginal revenue and what is the formula
Additional revenue arising from the scale of an additional unit of output
Change in total revenue / Change in quantity
What is a firms average revenue
Average Revenue per unit sold
Total Revenue / Quantity
What is AR always equal to
The price of the product
Why is the analysis of revenue not the same for all firms
Depends on whether or not the firm has any control over the price at which it sells its product
Which situations do we make a distinction on for a firms revenue
When the firm has no control over price and price is constant as output varies
The firm has some degree of control over price, and price varies with output
