Costs, Revenue, Profits Flashcards
What are the two types of cost in economics?
financial cost, opportunity cost
How is marginal cost calculated?
Change in total cost/ change in quantity
Why are marginal cost curves and average cost curves initially downward sloping?
There is increasing marginal productivity due to two reasons - specialisation between workers, underutilisation of fixed factors of production (eg land, capital).
What is the short run in economics?
Describes how there is at least one fixed factor of production.
Why do the average cost curves and marginal cost curves have an increasing section?
The law of diminishing marginal returns kicks in, marginal productivity falls. The fixed factors of production become a constraint on production.
What shape is the long run average cost curve?
A u shape
Which curve is the “Nike tick”
Marginal Cost Curve
Where does the marginal cost curve intercept the short run average cost curve?
At the bottom of the curve.
Why is the long run average cost curve initially downward sloping?
Economies of scale - unit advantages to expanding production in the long run.
Give some examples of internal economies of scale (reasons why the LRAC initially slopes downward)?
Technical economies, Purchasing economies (bulk buying), Managerial economies, Financial economies (lower interest rates given for larger firms), Marketing economies, Specialisation.
Why does the long run average cost curve begin to be upward sloping?
Diseconomies of scale set in.
What are some examples of diseconomies of scale (the reason why the LRAC curve begins to be upward sloping)?
Control and communication, co-operation, waste/inefficiency, regulatory costs
What is the mimiumum efficient scale?
The lowest level of output (on the long run average cost curve) where internal economies of scale have been fully exploited.
If MES can only be achieved at very high levels of output then the number of firms in the industry will be very…
Small
What are external economies of scale?
A whole industry grows larger and a firms average costs change.
What are external diseconomies of scale?
A firms costs increase due to the expansion of an industry.
What are examples of external economies of scale?
Cluster effect (firms locating in a certain area makes it more efficient for suppliers to meet a larger base of purchasers), skilled labour (encourages skilled labour to seek this area eg. Silicon Valley), transport links, supportive legislation (greater political influence of larger industry)
What are some examples of external diseconomies of scale?
Rapidly growing industry causes traffic congestion. Competition for scarce resources pushes up the cost of rent/wages/raw materials
How do external economies of scale affect the LRAC?
They push the curve downwards
What is point elasticity of demand?
Elasticity of demand at a particular point on a curve, calculated by %change in quantity over quantity divided by %change in price over price
How do you calculate total revenue?
Price x Quantity
What is average revenue the same as?
Price (price x quantity/quantity)
How do you calculate marginal revenue?
Change in total revenue/quantity
When is there maximum total revenue?
When marginal revenue =0
Up until MR =0 the firms revenue will increase as the point PED is…
Elastic ( the increase in quantity is greater than the fall in price)
What is the point PED when marginal revenue is 0?
Unitary
What shape is the total revenue curve?
An upside down U
When does the total revenue curve peak?
When MR=0, when the point PED is unitary.
What is normal profit?
A firm makes enough revenue to cover costs
What is super-normal profit?
When revenue exceeds costs
What is sub-normal profit?
When a firm makes a loss as revenue doesn’t cover costs.
When does a firm make maximum profit?
Where marginal profit is zero such that MC =MR
When does normal profit occur on a diagram?
When average cost = average revenue (or total cost =total revenue)
In the long run what type of profit dies a firm need to be making to continue to operate?
Normal profit
In the short run if a firm is not making normal profit should it necessarily close down?
No, the firm has to pay off fixed costs, so shutting down COULD POTENTIALLY make it worse off. This is dependent on the relationship between revenue and variable cost.
If average revenue is greater than average variable cost but not greater than average total cost a firm should…
Continue production even though it is loss making, Amy generated revenue will contribute towards paying off fixed costs.
