Diagrams Flashcards
Average Revenue (AR) curve
Marginal Revenue (MR) curve
The MR curve must:
Start at the same point as AR
Cross the Q axis at half the quantity AR crosses at
MR should end at the same quantity that AR ends at
An important fact about the Marginal Revenue (MR) curve
As price decreases and quantity increases, MR decreases.
MR decreases from positive to negative.
Total Revenue (TR) curve
When MR is positive, TR will increase as quantity increases.
When MR is negative, TR will decrease as quantity increases.
So the TR curve is increasing when MR is positive and the TR curve is decreasing when MR is negative.
PED changes along the demand curve
At high prices, demand is elastic because a % change in price will have a big impact, so consumers will be very responsive.
E.g. 10% of £1000 = £100
At low prices, demand is inelastic because a % change in price will have a small impact, so consumers will be unresponsive.
E.g. 10% of £10 = £1
PED and Marginal Revenue (MR)
When MR is positive, demand will be elastic.
When MR is 0, demand will be unitary elastic.
When MR is negative, demand will be inelastic.
Total fixed cost (TFC) curve
TFC does not vary with output because fixed costs are fixed!
Marginal cost (MC) curve
Remember: it looks like a Nike tick.
Explaining why the marginal cost (MC) curve goes down and then up
MC decreases because initially workers will specialise, increase productivity and decreasing marginal cost.
MC will then increase because diminishing marginal returns will set in, which will decrease productivity and increase marginal cost.
AFC
Average fixed cost is always falling because as quantity increases: Total fixed cost is spread across more units
Think of it as the always falling curve
How might we show external economies of scale on a diagram?
External economies of scale will shift the entire long run average cost curve downwards, from LRAC to LRAC1
Productive efficiency
When a firm is producing at its lowest average cost, where MC = AC.
- Allocative efficiency
When welfare is maximised, where MC = AR.
. X-inefficiency
When a firm is producing above its average cost curve for a given level of output.
Show the effect of internal economies of scale on a diagram.
Monopoly diagram
Just a regular costs and revenue diagram:
natural monopoly diagram
- Constant marginal cost simplification
When MC is constant, MC will be a straight line and MC = AC.
price discrimination diagrams:
Elastic demand is flatter.
Inelastic demand is steeper.
And total demand juts out at lower prices, because elastic consumers join the market.
Sketch the perfect competition diagram:
Sketch a diagram showing what will happen between the short run and long run, if a firm is making supernormal profit in the short run:
Firms are incentivised by supernormal profit to enter the market. There are no barriers to entry so they can easily enter the market. This increases supply from S to S1. This decreases price from Pe to P1, so price = lowest point along AC and all supernormal profit has been competed away. Only normal profit can be made in the long run.
Explain how price wars can harm firms’ profits using a game theory. Draw a payoff matrix and add text to comment on your payoff matrix. (4 marks)
If we fill out our payoff matrix, Pepsi and Coca Cola can make £2bn each by keeping their prices high…!
But Pepsi has an incentive to set a low price because by undercutting Coca Cola it can increase its payoff from £2bn to £3bn.
Equally, Coca Cola has an incentive to set a low price because by undercutting Pepsi it can also increase its payoff from £2bn to £3bn.
So both firms will cut their prices in an attempt to steal the other’s consumers! But that means they end up here…where they earn just £1bn each.
So by engaging in a price war, they’ve shot themselves in the foot - they could’ve had £2bn each…but will go home with just £1bn each.
Show the effect of internal economies of scale on a diagram.
Draw the effects of a subsidy on a costs and revenue diagram:
So…what do you think a labour market diagram will look like?
A labour market diagram has quantity of labour, QL, on the horizontal axis and instead of price, we’ve got the wage up top.
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Sketch a labour market diagram for McDonald’s workers, with elastic supply for labour:
