lesson 4 - theory of the firm: revenues Flashcards
what’s the equation for revenue?
price times quantity
P X Q
what’s the equation for profit?
total revenue - total costs
what is the L-shaped LRAC curve associated with?
large scale manufacturing
when do we have falling total returns?
when marginal returns turn negative
what is total returns?
the total amount of output a set of inputs produced
what is revenues?
amount a firm earns by selling goods and services in a given time period
what is costs?
the expenses that collected in the period of producing goods and services
what are the four factors of production?
land
labour
capital
enterprise
what is the production function?
the maximum output that can be produced given the inputs
how do you figure out total revenues?
average revenues times sales
AR X Sales
how do you figure out average revenues?
total revenues divided by sales
sales
what does price equal?
price = AR (average revenue)
what should producers do if they have a sensitive PED?
it means their demand is elastic
there are substitutes
so do not raise prices
or loss of revenue
when do we have high season?
when demand is inelastic (lack of choice)
busy
high prices
= producer sovereignty
when do we have low season?
when demand is elastic (choices)
not busy
low prices
= consumer sovereignty
what is consumer sovereignty?
when consumers have the power as there’s choice
what is producer sovereignty?
when producers have power due to lack of choice
when demand is inelastic what do firms do?
they raise prices to maximise revenues
what do firms do when demand is elastic?
cut prices to boost demand, clear stock and raise total revenue
what does differentiating a product do?
promotions which establish brand loyalty to make demand for their product more inelastic
what is marginal revenue?
the addition to the total revenue from the sale of one more unit
how do you figure out marginal revenue?
change in total revenue divided by change in output
change in
output
what are the four market structures?
perfect competition
monopolistic competition
oligopoly
monopoly
what is the theoretical market structure?
perfect competition
what are market structures formed by?
barriers to entry
how many firms are in all four market structures?
perfect competition: many
monopolistic competition: many
oligopoly: 2-4 dominate
monopoly: 1
what is the variety of goods like in all four market structures?
perfect competition: none
monopolistic competition: some
oligopoly: some
monopoly: none
how much control over prices does all four market structures have?
perfect competition: none
monopolistic competition: low
oligopoly: high
monopoly: all/complete
what’s the barriers to entry and exit like in all four market structures?
perfect competition: none
monopolistic competition: low
oligopoly: high
monopoly: complete
what should we do when we have excess demand?
bid up prices
what should we do when we have excess supply?
cut prices to clear stock
what are the assumptions of perfect competition?
homogenous output (all the same with no variety)
many firms
consumers and producers cannot affect the price as its set by the market mechanism
no asymmetric information so perfect consumer and producer knowledge
freedom of entry and exit
consumers can buy as much as they wants and producers can sell as much as they want
what is the market mechanism?
demand and supply
what are the features of AR and MR in perfect competition?
perfectly elastic demand
we can sell any quantity of a good or service but cannot influence price
because everything is selling at the same price that means the additional unit (marginal revenue) will be the same as the AR
how does the AR and MR curves work in a monopoly?
the marginal revenue curve must lie between the AR/demand curve
if we cut prices to sell more/clear stock the MR curve must also slope downwards at a steeper angle because the additional units will be sold at an even lower price
when do we have revenue maximisation?
MR=0
