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Economics Theme 3 > LS3 - Costs and Revenues > Flashcards

LS3 - Costs and Revenues Flashcards

1
Q

What key decisions do firms need to make regarding production?

due to costs

A

Firms must decide on the quantity of output

this involves the inputs of factors of production needed, how these factors are combined as well as the prices of the factors of production.

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2
Q

What does this section focus on in relation to firm production?

A

The relationship between costs and the level of output produced by a firm.

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3
Q

For simplicity what assumptions are made about the firm’s production?

A

The firm produces a single product using two factors of production: labour and capital.

its also impotant to distinguish between the short run and the long run

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4
Q

How do short-run and long-run differ in terms of firm decisions?

A

In the short run firms can vary labour easily but not capital. Hence, labour is a regarded as a flexible factor and capital as a fixed factor

In the long run , firms can vary both labour and capital.

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5
Q

Why is labour considered a flexible factor and capital a fixed factor in the short run?

A

Labour can be increased quickly through overtime or hiring, whereas increasing capital takes longer, such as commissioning machinery or building a factory.

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6
Q

What defines the short run for a firm?

A

The period over which the firm can vary inputs of variable factors but not fixed factors. (whereas, in the long-run the firm can vary either as it wishes)

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7
Q

What is the law of diminishing returns?

A

If the firm increases the amount of inputs of the variable factor (labour) while holding constant the input of the other factor (capital) it will gradually derive less additional output per unit of labour for each further increase (additional output per unit of labour decreases)

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8
Q

What example illustrates the law of diminishing returns?

using computers and proogrammers

A

If a firm with 10 computers hires more programmers, each additional programmer adds less output, and eventually, new hires add no output due to limited computer access.

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9
Q

How are costs categorized in the short run?

A

Some costs are fixed because these inputs cannot be varied in the short run (e.g., leased machinery) and some are variable (e.g., wages for short-term staff).

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10
Q

What are sunk costs?

A

Costs that the firm must pay even if it produces no output, fixed costs in the short run.

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11
Q

What is the formula for total costs?

A

Total costs = Total fixed costs + Total variable costs.

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12
Q

look at fig 1.1 on onenote
diagram of costs in the short run

A
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13
Q

How do total costs change with production volume in the short run?

A

Total costs increase as production volume increases due to the need for more variable inputs.

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14
Q

How do total costs behave at very low levels of output in the short run?

A

Total costs rise more slowly than output initially, but accelerate as diminishing returns set in.
see Fig 1.1

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15
Q

How do firms adjust their inputs in the long run?

A

Firms vary both capital and labour to choose the appropriate level of capital for expected output.

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16
Q

What does Figure 2 represent?

see onenote

A

Short-run average cost curves for different expected output levels and different levels of capital.

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17
Q

How is Average Fixed Cost (AFC) calculated?

A

AFC = Fixed Costs / Output

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18
Q
  • Q: What is the AFC if a firm’s fixed costs are £1000 and output is 100?
A

AFC = Fixed Costs / Output
AFC = £1,000 / 100 = £10 per unit of output

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19
Q
  • Q: What happens to AFC as output increases?
A

AFC continues to fall because the fixed cost is spread across a greater output

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20
Q
  • Q: What would the AFC be if the same firm produced 200 units of output?
A

AFC = £1,000 / 200 = £5 per unit of output

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21
Q
  • Q: How is Average Variable Cost (AVC) calculated?
A

AVC = Variable Costs / Output

22
Q
  • Q: What is the AVC if a firm’s total variable costs are £5,000 and output is 100?
A

AVC = £5,000 / 100 = £50 per unit of output

23
Q
  • Q: How is Average Total Cost (ATC) calculated?
A

ATC (or AC) = AFC + AVC or Total Cost / Quantity Produced

24
Q
  • Q: What is the ATC if AFC is £10 and AVC is £50 at an output of 100?
A

ATC = £10 + £50 = £60 per unit of output

25
Q
  • Q: How is Marginal Cost (MC) calculated?
A

MC = Change in Total Cost (ΔTC) / Change in Output (ΔQ)

26
Q
  • Q: What is the MC when output increases from 0 to 1 and total cost rises by £19?
A

MC = £19

27
Q
  • Q: Explain the relationship between marginal cost and average costs using height as an analogy.
A

If the marginal height (cost) of the next person (unit) added is less than the average height (cost), the average will fall. If it is more, the average will rise. If it is equal, the average remains unchanged.

28
Q
  • Q: What is the significance of the marginal cost curve in relation to AVC and ATC curves?
A

Marginal cost always goes through the minimum point of both the AVC and ATC curves.

29
Q

see onenote for diagram of MC, AC, AVC, AFC diagram

A
30
Q
  • Q: How does the gap between ATC and AVC change as output rises?
A

The gap gets smaller because AFC falls as output rises and AVC starts to rise due to the law of diminishing returns.

31
Q
  • Q: Why does AVC start to rise due to the law of diminishing returns?
A

As more units of a variable factor are added to a fixed factor, additional output per unit of the variable factor decreases, increasing the average variable cost.

32
Q
  • Q: What are revenues?
A

Payments firms receive when they sell goods and services over a given time period.

33
Q
  • Q: What are the three fundamental revenue concepts?
A

Total revenue (TR), marginal revenue (MR), and average revenue (AR).

34
Q
  • Q: How is Total Revenue (TR) calculated?
A

TR = Price (P) x Quantity (Q)

35
Q
  • Q: How is Marginal Revenue (MR) calculated?
A

MR = ΔTR / ΔQ (change in total revenue divided by change in quantity)

36
Q
  • Q: How is Average Revenue (AR) calculated?
A

AR = TR / Q (total revenue divided by quantity)

37
Q
  • Q: Why is Average Revenue (AR) always equal to the price (P)?
A

Since AR = TR/Q and TR = P x Q, it follows that AR = P.

38
Q
  • Q: What determines the analysis of revenues for different firms?
A

Whether or not the firm has control over the price at which it sells its product.

Firms under highly competitive conditions have no ability to influence price. Firms operating under less competitive conditions do have varying degrees of control over price, depending on their degree of market power

39
Q
  • Q: What are the two scenarios regarding a firm’s control over price?
A

1) No control over price, price is constant as output varies.
2) Some control over price, price varies with output.

40
Q
  • Q: What happens to the price at which a good is sold under perfect competition?
A

The price does not change; the firm has no control over the price.

41
Q
  • Q: How is total revenue calculated for a firm with no control over price?
A

By multiplying the constant price by the quantity of goods sold

42
Q
  • Q: How does total revenue (TR) change for a firm with some control over price?

for all market models other than perfect competition

A

TR varies as the price changes with the quantity of output.

43
Q
  • Q: What relationship exists between price elasticity of demand (PED) and revenue concepts?
A

PED influences both average revenue and marginal revenue curves.

44
Q

look at revenue diagrams for firms experiencing perfect and not perfect competition

on onenote

A
45
Q
  • Q: How is price elasticity of demand (PED) calculated?
A

PED = Percentage change in quantity demanded / Percentage change in price

46
Q

what is the relationship between price elasticity and the revenue curve/

A

elasticity changes at different points along the curve. We can then apply this information to work out what happens to total revenue when prices are changed on the elastic and inelastic parts of the average revenue curve

47
Q
  • Q: What happens to total revenue on the elastic part of the demand curve if prices fall?

elastic = greater than 1

A

Total revenue increases because the increase in sales is proportionately greater than the fall in price.

48
Q
  • Q: What happens to total revenue on the inelastic part of the demand curve if prices rise?

inelastic = less than one

A

Total revenue increases because the decrease in sales is proportionately smaller than the rise in price.

49
Q
  • Q: What is the effect on total revenue if a firm lowers prices on the elastic part of the demand curve?
A

Total revenue increases.

50
Q
  • Q: What is the effect on total revenue if a firm raises prices on the inelastic part of the demand curve?
A

Total revenue increases.

51
Q
  • Q: What is the effect on total revenue if a firm raises prices on the elastic part of the demand curve?
A

Total revenue decreases

52
Q
  • Q: What is the effect on total revenue if a firm lowers prices on the inelastic part of the demand curve?
A

Total revenue decreases

Economics Theme 3 (7 decks)

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