Lesson 4 - Theory Of The Firm: Revenues Flashcards
Define revenues
The amount a firm earns by selling a good or service in a period of time
What is marginal revenue?
The amount a firm earns by producing one more of a good or service
What is a margin?
The profit per unit
What are fixed, variable and marginal costs?
Fixed = costs that don’t change with output
Variable = costs that vary with output
Marginal = the cost of producing one more
What is supernormal/abnormal profit?
Profit above what is needed to survive as a firm
What are costs?
The expenses of producing a good or service
How do you calculate TR and AR?
TR = AR x sales
AR = TR / sales
What does the ability to cut prices show?
Market power
What is the relationship between PED and revenue?
If PED is inelastic, then firms can raise prices and still increase revenue
If PED is elastic, then firms should lower prices
What is the relationship with demand elasticity and prices?
If demand is elastic, firms should cut prices to boost demand and total revenue
If demand is inelastic, firms should boost prices in order to boost total revenue
How do firms make their demand inelastic, so that they can raise prices in the future?
- the use promotions to differentiate their product from the competition and achieve brand loyalty
What is the equation for marginal revenue?
Change in TR / Change in output
What are the assumptions of perfect competition?
- neither the buyer or seller can affect the market ruling price (set by the market/price mechanism)
- many firms
- freedom of entry or exit (no barriers to entry)
- perfect information for the consumer and the producer
