Micro Unit 1- Cost, Revenue And Profit Flashcards
What is the formula for profit?
Profit= revenue-total cost
What is the formula for revenue?
Revenue= price x quantity
What is the formula for total cost?
Total cost= fixed cost + variable cost
What are fixed costs?
What are variable costs?
Fixed costs are costs that do not change based on output, they stay constant e.g. Rent, bank loans
Variable costs are changes in direct correlation with output e.g. raw materials, wages
How do firms maximise profit?
By making sure revenue and total cost is monitored- a business must find the point at which resources are optimised and maximised by finding their point of marginal diminishing returns.
What are variable factors of production in the short run?
What are fixed factors of production in the short run?
Variable factors of production are the factors which can easily vary in size/quantity e.g. farm workers (hire more) or fertiliser (buy more)
Fixed factors of production are factors that cannot easily vary in size/quantity e.g. size of filed, machines (expensive to replace)
What is the short run for factors of production?
The short run is the period of time within which at least one factor of production (CELL) is fixed in size or quantity. Does not or cannot change easily or quickly
What does the law of diminishing returns state?
In the short run when one factor is fixed e.g. capital, if the variable factor is increased e.g. labour there comes a point where they will become less productive and output starts to increase at a diminishing rate. Eventually output will decrease. This law only applies in the short run because in the long run all factors are variable.
Product curves:
Define total product (TP)
Same as total output. This is the totally output produced by workers
Define marginal product (MP)
This is the additional output produced by adding one extra worker in the short run. Difference between the total output and the previous total output.
Define average product (AP)
What is the formula?
Measures output per workers-employed.
Total output/total employees
When does diminishing returns occur for product curves?
Diminishing returns occurs when marginal products starts to fall. This means that total out would be increasing at a decreasing rate.
What does the diagram look like for fixed, variable and total costs?
Look at notes
- Why are fixed costs always a straight line horizontal?
- Explain why variable costs start at zero and slope diagonally upwards?
- Explain why total costs start at the fixed costs point and slope up diagonally on the same gradient as variable costs?
- No matter the quantity demanded, in the short run the cost does not change
- Variable costs start at zero because as the quantity demanded increases, the financial costs becomes more expensive
- Total costs start at the same point as fixed costs as no matter the quantity the cost can never be less than this and then slopes up with the same gradient as variable costs.
What does the diagram look like for average fixed costs (AFC), Average total costs (ATC) and Average variable costs (AVC)?
Look at notes
How are average fixed costs (AFC) calculated?
Average fixed costs= total fixed costs/output
Define average total costs (ATC)
What is the formula?
Also called average cost of unit. Average total costs include how efficiently scarce resources are being used.
Average variable costs= total variable costs/output
Explain the shape of the Average variable costs curve?
It is u shaped and will at first slope downward as from left to right then reach a minimum point and then rise again due to diminishing returns.
Explain the shape of the average total cost curve?
It is also u shaped
Define optimum factors combination?
The combination of factors with which a firm can produce a specific quantity of output at the lowest possible cost.
- Explain why ATC is always above AVC and AFC?
2. Explain why AFC does not have an upwards turn/U shape like the other two?
- ATC is always at the top because it is the combination of both AVC and AFC.
- AFC does not have an upwards turn because there is no diminishing return
Define marginal costs?
Formula?
The additional change in total cost when another unit is produced. It is the addition to total cost from one extra unit produced.
Marginal costs= change in total cost/change in quantity