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micro Economics > Costs,revenue and profit > Flashcards

Costs,revenue and profit Flashcards

1
Q

what is the short run

A

a time period when at least on factor of production is in fixed supply

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2
Q

What two factor of production inputs are usually fixed

A

land and capital

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3
Q

Avearge product

A

output per worker

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4
Q

How to calculate average product

A

total products/input of labour

For example, a factory that produces 100 widgets with 10 workers has an average product of 10.

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5
Q

Marginal (physical) product

A

The change in output from increasing the number of workers by one

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6
Q

How to calculate marginal product

A

change in total output/change in quantity of labour

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7
Q

3 reasons on why can labour productivity increase as you employ more workers

A
  1. as each worker learns from the one before
  2. specialisation
  3. underutilisation of capital
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8
Q

why can labour productivity decrease

A

fixed factors of production can constrain production

Eg overcrowding

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9
Q

Average variable cost calculation

A

Total variable cost/output

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10
Q

Law of diminishing return

A

as a firm adds units of a variable factor of production (such as labour) the extra output will first rise then fall

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11
Q

Long run

A

When all factors of production are variable

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12
Q

What does it mean to scale up

A

Increase size of production

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13
Q

Why is the long run essentially many short runs

A

As firms will always be limited by a fixed factor of production at some point

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14
Q

When does increasing returns to scale occur

A

When % change in output>% change in imput.

When average costs fall

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15
Q

When does decreasing returns to scale occur

A

When %change in output< % change in Input

When average costs starts to rise

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16
Q

When does constant returns to scale occur

A

When % change in output = % change in imput

When average costs stay the same

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17
Q

How to calculate returns to scale

A

%change in output/%change in input (usually labour)

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18
Q

Why do business benefit from increasing returns to scale

A

Economies of scale

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19
Q

What is the Minimum efficient scale

A

The lowest level of output required to exploit full economies of scale.

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20
Q

Why do natural monopolies have larger potential for economies of scale.

A

AS in some cases it is cheaper to producer more.
For example, it would make no sense to have many small companies providing tap water because these small firms would be duplicating investment and infrastructure. The large-scale infrastructure makes it more efficient to just have one firm – a monopoly.

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21
Q

Marginal cost definition

A

Marginal cost is the additional cost incurred in the production of one more unit of a good or service.

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22
Q

Average revenue calculation

A

Often means price

Total revenue/ total products

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23
Q

Marginal revenue calculations

A

change in total revenue/ change in total output quantity

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24
Q

Marginal revenue definition

A

change in revenue as an extra product is sold

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25
Q

Where is total revenue maximised

A

when MR= 0

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26
Q

What is the profit maximisation

A

when MR=MC

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27
Q

normal profit

A

is the minimum amount of profit required to keep factors of production in their current use.

if normal profit is not achieved the business should produce their opportunity cost (making tablets instead of computers)

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28
Q

supernormal profit

A

Supernormal profit-the excess profit above the minimum amount of profit required to keep factors of production in their current use. (normal profit)

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29
Q

Classical economic theory suggests firms will seek to maximise profits?

why may firms not seek to profit maximise

A
  1. may want to price out competitors
  2. want increased brand equity
  3. Economies of scale. Lower price and higher sales can help firms with high fixed costs gain economies of scale (lower average costs). This could lead to lower prices for consumers.
30
Q

why may firms want to earn supernormal profit

A
  1. so they can reinvest in their product (less money on tax and more on their products
  2. Enables firms to build up reserves to survive economic downturn
31
Q

subnormal profit

A

any profit below the minimum amount needed to keep factors of production in their current use.

this occurs when to profit made does not cover the opportunity cost

32
Q

when is SNP achieved

A

AR>AC

33
Q

when is normal profit achieved

A

AR=AC

34
Q

when is sub normal profit achieved

A

AR

35
Q

where is allocative efficiency achieved

A

AR=MC

36
Q

what is allocative efficiency

A

This is because the price that consumers are willing to pay is equivalent to the marginal utility that they get

37
Q

productive efficiency

A

occurs when combinations the factors of production results in the maximum level of output for the lowest cost possible

38
Q

where is productive efficiency achieved

A

the lowest point of the AC curve

39
Q

what type of demand for labour

A

it is derived from the demand for goods and service,

firms hire workers because they need to provide goods and services

40
Q

marginal revenue product

A

the extra revenue gained as an extra worker is employed

41
Q

how to calculate MRP

A

MRP= MPP X MR

42
Q

marginal revenue

A

the increase in revenue as a result of selling one extra product

43
Q

why does the MRP (the demand curve for an individual firm) rise then fall

A

as workers become less productive as factors of production are limited

EG fixed land making the workforce overcrowded

44
Q

at what point will firms hire workers until

A

when MRP= wage rate

45
Q

what is the MPP

A

marginal physical product

The change in output as a result of a change in input such as labour.

46
Q

why may the demand for labour be inelastic

A
  1. if the PED is elastic for the final product produced
  2. if there are less substitutes of labour (such as using a machine to do a brain surgeon).
  3. if labour costs are a small proportion of total costs
  4. if it takes a longer time to substitute labour and change contracts
47
Q

problems in measuring MRP

A
  1. not all goods and services have a market price (teachers)
  2. measuring productivity and efficiencies
  3. when working in teams (football) its hard to establish the productivity of workers.
48
Q

why may current inflation harm dynamic efficiencies

A

investors may demand higher dividends to combat the impact of inflation. this mean mean less money can be reinvested into the business and dynamic efficiencies can’t be achieved.

49
Q

explain the role in profit in a market

A
  1. can cause dynamic efficiencies as firms seek to differentiate themselves on non price factors
  2. may attract new entrants into the market
50
Q

why may profit be a sole objective for perfect competition

A

because if they produced at any other output they would not even make normal profit and therefore would not be able to stay in the market.

51
Q

evaluation of perfect competition

A

theoretical market structure and not realistic in the real world

52
Q

why may a firm choose to maximise sales

A

firms that want to increase in size and therefore increase sales and increase their reputation and loyalty and increase the barriers to entry and gain pricing power in the long term.

eg Aldi have got pricing power after having low prices

53
Q

why is the MC curve like a nike tick

A

law of demising marginal returns.

when an extra unit of labour is employed it may specialise which may lower the cost of the new worker

however overtime as factors of production become more limited as they are fixed there may be overcrowding and workers may get less productive causing MC to increase

54
Q

what is the shut down condition

A

AR=AVC
or

AR

55
Q

how to calculate the social cost

A

private and external cost

56
Q

how to calculate GDP

A
  1. add up total value of goods and service
  2. add up all factor incomes (rent for land, incomes for labour)
  3. add C+I+G+(X-M)
57
Q

nominal GDP

A

total value of goods and services X current prices.

58
Q

real GDP

gdp is always on top

A

total value of goods and services produced X constant prices (in the base year)

nominal GDP
——————- x100
price index

59
Q

how to work out mini coefficient

A

total area beneath the perfect equality

60
Q

how to calculate terms of trade

exports are always on top

A

index of export prices
———————————-x100
index of import prices

61
Q

how to calculate marginal rate of tax

A

change in total income tax paid
———————————————— X100
total income

62
Q

how to calculate average tax

A

total income tax paid
———————————————— X100
total income

63
Q

how to calculate change in national income

A

initial injection X multiplier

64
Q

when does the multiplier take place

A

when there is a change in national income as a result of an injection of a withdrawal

65
Q

what happens to total revenue when the price increases for a market where demand is inelastic

A

total revenue will increase

66
Q

what happens to total revenue when the price increases for a market where demand is elastic

A

total revenue will decrease

67
Q

when do price increases not result in increased total revenue

A

when demand is unitary elastic

68
Q

what is a proportional tax

A

flat tax

69
Q

what happens to average income tax in a progressive tax system

A

average taxes rise as people earn more

70
Q

how to calculate real GDP per capita

A

real GDP
————— X100
population index

71
Q

how to calculate index

A

recent data
—————- x100
base year data

micro Economics (8 decks)

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