Costs,revenue and profit Flashcards
what is the short run
a time period when at least on factor of production is in fixed supply
What two factor of production inputs are usually fixed
land and capital
Avearge product
output per worker
How to calculate average product
total products/input of labour
For example, a factory that produces 100 widgets with 10 workers has an average product of 10.
Marginal (physical) product
The change in output from increasing the number of workers by one
How to calculate marginal product
change in total output/change in quantity of labour
3 reasons on why can labour productivity increase as you employ more workers
- as each worker learns from the one before
- specialisation
- underutilisation of capital
why can labour productivity decrease
fixed factors of production can constrain production
Eg overcrowding
Average variable cost calculation
Total variable cost/output
Law of diminishing return
as a firm adds units of a variable factor of production (such as labour) the extra output will first rise then fall
Long run
When all factors of production are variable
What does it mean to scale up
Increase size of production
Why is the long run essentially many short runs
As firms will always be limited by a fixed factor of production at some point
When does increasing returns to scale occur
When % change in output>% change in imput.
When average costs fall
When does decreasing returns to scale occur
When %change in output< % change in Input
When average costs starts to rise
When does constant returns to scale occur
When % change in output = % change in imput
When average costs stay the same
How to calculate returns to scale
%change in output/%change in input (usually labour)
Why do business benefit from increasing returns to scale
Economies of scale
What is the Minimum efficient scale
The lowest level of output required to exploit full economies of scale.
Why do natural monopolies have larger potential for economies of scale.
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.
Marginal cost definition
Marginal cost is the additional cost incurred in the production of one more unit of a good or service.
Average revenue calculation
Often means price
Total revenue/ total products
Marginal revenue calculations
change in total revenue/ change in total output quantity
Marginal revenue definition
change in revenue as an extra product is sold
Where is total revenue maximised
when MR= 0 or when MC=MR
What is the profit maximisation
when MR=MC
normal profit
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)
supernormal profit
Supernormal profit-the excess profit above the minimum amount of profit required to keep factors of production in their current use. (normal profit)
Classical economic theory suggests firms will seek to maximise profits?
why may firms not seek to profit maximise
- may want to price out competitors
- want increased brand equity
- 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.
why may firms want to earn supernormal profit
- so they can reinvest in their product (less money on tax and more on their products
- Enables firms to build up reserves to survive economic downturn
subnormal profit
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
when is SNP achieved
AR>AC
when is normal profit achieved
AR=AC
when is sub normal profit achieved
AR
where is allocative efficiency achieved
AR=MC
what is allocative efficiency
This is because the price that consumers are willing to pay is equivalent to the marginal utility that they get
productive efficiency
occurs when combinations the factors of production results in the maximum level of output for the lowest cost possible
where is productive efficiency achieved
the lowest point of the AC curve
what type of demand for labour
it is derived from the demand for goods and service,
firms hire workers because they need to provide goods and services
marginal revenue product
the extra revenue gained as an extra worker is employed
how to calculate MRP
MRP= MPP X MR
marginal revenue
the increase in revenue as a result of selling one extra product
why does the MRP (the demand curve for an individual firm) rise then fall
as workers become less productive as factors of production are limited
EG fixed land making the workforce overcrowded
at what point will firms hire workers until
when MRP= wage rate
what is the MPP
marginal physical product
The change in output as a result of a change in input such as labour.
why may the demand for labour be inelastic
- if the PED is elastic for the final product produced
- if there are less substitutes of labour (such as using a machine to do a brain surgeon).
- if labour costs are a small proportion of total costs
- if it takes a longer time to substitute labour and change contracts
problems in measuring MRP
- not all goods and services have a market price (teachers)
- measuring productivity and efficiencies
- when working in teams (football) its hard to establish the productivity of workers.
why may current inflation harm dynamic efficiencies
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.
