LS3 - Costs & Revenues Flashcards
Short run
- at least one fixed factor of production
- the period over which the firm is free to vary the input of variable factors but not fixed factors
- capital and land usually fixed
- usually vary labour
Long run
- When all factors of production are variable
- can vary capital and labour
- likely firm will choose the level of capital that’s appropriate for output level it expects to produce
Law of diminishing returns
- in short run, assuming capital is fixed, if the variable inputs increase then gradually there will be less additional output per unit of labour
- states that in the short run when variable factors of production are added to a stock of fixed factors of production marginal product will rise then fall
Fixed costs vs variable costs
- known as sunk costs - can’t avoid paying even if output is 0
- vary with output, for example wages/operating costs
total costs
total fixed costs + total variable costs
total fixed costs on graph (short run)
horizontal line - does not vary with output
total variable costs on graph (short run)
- curve ( like cubic kind of)
- initially increasing returns to labour, as costs (e.g. labour) increases so does output
- at start costs are high as need to initially hire workers
- as gets horizontal output increases without costs doing so too much
- then law of diminishing returns sets in and costs accelerate
total costs on graph (short run)
like TVC just starting higher in line with TFC
LRAC curve
- join lots of SRAC curves together
- kind of like quadratic with horizontal bottom
Average fixed costs (AFC)
AFC = Fixed Costs / Output
- as output increases AFC will continue to fall as fixed cost is being spread over greater output
- on graph negative gradient (not linear)
Average variable costs (AVC)
AVC = Variable Costs / Output
- Shaped like quadratic, -ve gradient is when productivity increases as labour does so AVC falls, +ve gradient is due to law of diminishing returns
Average Cost/Average total cost (AC/ATC)
AFC + AVC = AC
AC = TC/Q
Marginal cost (MC)
- change in total cost when one additional unit of output is produced
- like quadratic but more of the +ve gradient and goes through minimum of AVC & AC
relationship between AVC & AC on graph
- same shape with AC above AVC
- gap between is AFC
- but as output rises gap closes and AVC is closer to AC as AFC falls as costs spread out more as output increases
Revenue
- payments firms receive when they sell goods/services they produce over a given time period
Total Revenue (TR)
TR = P x Q
Marginal Revenue (MR)
- additional revenue arising from sale of an additional unit of output
MR = change TR / change Q
Average revenue (AR)
AR = TR / Q
AR = P
as AR = (P x Q) / Q so Q cancels out
when firm has no control over price
- Perfect competition with infinite buyers/sellers and identical goods/services - price takers and no barriers to entry/exit
- MR=AR as price stays then same and doesn’t change
- so MR=AR=P and is horizontal as doesn’t change
- so TR is linear, revenue increases by same amount each time output does
when firm has control over price
- imperfect competition, few buyers/sellers with differentiated goods/services, price makers and barriers to entry/exit
- price at which good is sold changes as output does
- MR doesn’t equal AR
- AR=D
- AR=D & MR are negative linear lines with MR twice as steep
- TR is negative quadratic shape
relationship between PED and AR & MR
- top half of D curve is elastic and bottom is inelastic, same for AR as D=AR
- so then when elastic, if prices fall, then total revenue rises
- so then when inelastic, if prices fall, then total revenue falls
