Costs and Revenues Flashcards
what is the short run
atleast one fixed factor of production
what is the long run
all factors of production are variable
examples of fixed costs
rent
salaries
interest on loans
examples of variable costs
wages
utility bills
raw material costs
formula for TFC
TC - TVC
or
AFC x Quantity
formula for AFC
TFC / Quantity
AC - AVC
formula for AVC
TVC / Quantity
AC - AFC
shape of TFC graph
horizontal line
shape of AFC
downwards sloping
shape of AVC / what does it do
U shape
falls then rises
why does AVC fall then rise
falls until law of diminishing returns kicks in
what is the law of diminishing returns
when adding an additional factor of production results in a smaller increase in output than the previous addition
formula for MP
change in TP / change in quantity
formula for AP
TP / Quantity
shape of MP
rises then falls
shape of AP
rises then falls
what must the MP graph do
cut AP at its highest point
why does MP originally rises
as more workers are hired, they begin to specialise and therefore become more productive.
under-utilised fixed factors of production begin to be used more efficiently
why does MP fall
due to the law of diminishing returns
the fixed factors of production have become a constraint on production so efficiency decreases
shape of TP
rises then falls
maximised when MP is 0
when is TP maximised
when MP is 0
formula for MC
change in total cost / change in quantity
formula for AC
TC / Quantity
or
AFC + AVC
shape of MC
falls then rises
cuts AC at AC’s lowest point
shape of AC
falls then rises
u shape
is cut by MC at its lowest point
when does MC cut AC
at its lowest point
why does MC fall
because as MP rises, due to specialisation and utilisation of factors of production, MC falls
why does MC rise
the law of diminishing returns kicks in as MP falls meaning MC rises as the fixed factors of production constraints production
shape of TC curve
like the tan graph
shape of TVC curve
like the tan graph
shape of TFC
horizontal line
why do the TVC and TC curves become steeper
they go from increasing returns to labour TO decreasing returns to labour
shape of LRAC
Multiple U shapes
Downward sloping
why does the LRAC curve fall
economies of scale
why does the LRAC curve plateau
constant returns to scale
why does the LRAC curve rise
diseconomies of scale
formula for TR
P x Q
formula for AR
TR / Q = P
formula for MR
change in total revenue / change in total quantity
shape of AR in perfect competition
horizontal
shape of TR in perfect competition
linear
shape of AR in imperfect competition
downwards sloping from left to right
shape of MR in imperfect competition
downwards sloping line twice as steep as AR
shape of TR in imperfect competition
rises then falls when MR is at 0
what is average revenue (AR) the same as on a graph
demand
when is total revenue maximised
when MR = 0
what causes a change in price/profit levels
fixed costs
variable costs
demand
what will a change in fixed costs shift
AC
what will a change in variable costs shift
AC and MC
what will a change in demand shift on costs and revenues diagram
AR and MR
