Micro 15 - Costs and Revenues Flashcards
Define Total revenue (TR)
Total revenue is also called turnover. It is the amount of money the firm receives from all its sales over a certain period
State the formula used to calculate Total revenue
TR = P*Q
Define Average revenue (AR)
Average revenue is the average receipt per unit sold. AR equals the price charged for the product meaning the demand curve is also the average revenue curve
State the formula used to calculate Average revenue
AR = TR/Q = P*Q/Q = P
Define Marginal revenue (MR)
Marginal Revenue is the the revenue associated with each additional unit sold - the change in total revenue from selling one more unit
State the formula used to calculate Marginal revenue
MR = change in total revenue / change in quantity
How can MR be calculated from the TR curve?
MR is the gradient of the TR curve
Why is the MR and AR curves downwards sloping?
The MR and AR curves are downward sloping as the firm can only sell one more unit by reducing the price. Therefore the MR will always be lower than the AR except in perfect competition
What is the relationship between the steepness of the MR and AR curves?
The MR curve is always twice as steep as the AR curve meaning it should cut the x-axis at half the output that the AR curve does
What is the value of MR when TR is maximised?
MR=0
Why is TR maximised when MR=0?
After MR=0 MR becomes negative so TR begins to fall as the price is lowered to sell more units
When demand is price elastic what effect will increasing and decreasing price have on total revenue?
- Increasing price will decrease total revenue
- Decreasing price will decrease total revenue
When demand is price inelastic what effect will increasing and decreasing price have on total revenue?
- Increasing price will increase total revenue
- Decreasing price will decrease total revenue
Defined Fixed costs (FC)
Fixed costs are costs which do not vary as the level of output produced changes
Define Variable costs (VC)
Variable costs are costs which are directly related to the level of output produced
State the formula for calculating Average fixed costs (AFC)
AFC = TFC / Q
Draw the AFC curve on a costs and quantity diagram
See page 13 in pack 15
Explain the shape of the AFC curve
The AFC curve slopes downwards because fixed costs do not vary with output
State the formula used to calculate Average variable costs (AVC)
AVC = TVC / Q
What is the effect on marginal costs and average costs when fixed costs change?
When fixed costs change, marginal costs doesn’t change and average costs changes
What is the effect on marginal costs and average costs when variable costs change?
When variable costs change, marginal costs changes and average costs changes
How can you calculate marginal cost from TVC
Marginal cost = Change in TVC
Define the Short run
The Short run is a time period in which at least one factor of production is fixed. It cannot be changed even if there is a change in demand
Define the Long run
The Long run is a time period when all factors of production are variable
Does the marginal cost (MC) curve slope upwards or downards?
Initially downwards then upwards
Draw the MC curve and explain its shape
See page 16 in pack 15
Explain the shape of the MC curve
- In the MC curve we are looking at the short run
- Initially as output rises more staff are hired to make these units. More staff members means the production process can be divided into smaller tasks - division of labour. This specialisation of workers means higher labour productivity. Workers are getting paid the same wage as each as when output per worker was lower but the firm is now getting more output from them. This lowers marginal and average costs which explains why initially marginal cost fall as output rises (shown by the dip in the curve)
- Eventually diminishing returns sets in
- Diminishing returns occurs in the short run when one factor of production is fixed. If the variable factor of production is increased there comes a point where the next worker will become less productive then the worker before them. This arises when staff are operating within the constraints of fixed factors of production. This decreases the output of each extra worker - diminishing returns has set in
- As productivity falls workers are still getting paid the same each but less output is generated so costs per unit produced rise. This is why MC and AC fall then rise
State the law of diminishing returns
The law of diminishing returns states that if increasing quantities of a variable input are combined with a fixed input, eventually the marginal and average product of that variable input will decline
Where does the AC curve cross the MC curve?
The AC curve crosses the MC curve at its lowest point
Draw the TC, TVC and TFC curve on a diagram and explain their shapes
See page 21 in pack 15
Draw the MC, ATC, AVC and AFC curves on a diagram
See page 19 in pack 15
