Micro 7: Revenue, Profit and Efficiency Flashcards
What is total revenue?
The total sales revenue a firm receives over a given period of time. Number of units sold x price of the good.
TR = P x Q
What is average revenue?
The revenue gained per unit sold.
AR = TR / Q
What is marginal revenue?
The amount that one more unit sold will increase or decrease revenue by. The change in total revenue after output is increased by one unit.
MRn = TRn - TRn-1
What is normal profit?
The profits required to keep the entrepreneur/firm operating in the industry. These are contained within the costs of the firm (a fixed cost).
What is supernormal/abnormal profit?
Profits additional to those required to keep the entrepreneur or firm operating in the industry.
TR - TC
At which level of output is profit maximised?
Where MC crosses MR because beyond this point, MC is bigger than MR so no profit, and before this point MR is bigger than MC but we need to maximise MR so that there’s more profit each time so total profit increases. This point is also where TR and TC have the biggest gap.
At which level of output is revenue maximised?
Where MR crosses 0 because any point to the right is where MR is negative, and to the left of this point MR is positive so it’s producing one more unit so always giving more revenue so TR keeps rising, always rises as MR falls. So, TR is only maximised when there’s no more extra revenue to be gained.
What is allocative efficiency?
A state of an economy or industry in which production best reflects the preferences of consumers. Every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.
