O'keefe Revision Guide - Profit And Revenue Flashcards
What is marginal revenue?
The increase in revenue from selling one extra unit
What is average revenue?
Total revenue/Q
What is normal profit and when does it occur?
It is when TR=TC, and is the break even point for a firm
What is supernormal profit?
When TR > TC
Gives 3 alternative aims of firms, rather than profit maximising
Profit satisfying
Growth maximisation
Social/ environmental concerns
Describe profit satisfying as an alternate aim of a firm
Profit satisfying is the managers making enough profit to keep the owners happy. It occurs as in many firms, there is a separation between ownership and control, and the managers have less incentive to maximise profit as they don’t get the same return, so they sacrifice profit maximisation for other objectives such as enjoying work
Describe growth maximisation as an alternate aim of firms
Where firms seek to increase their market share, even if it means less profit. Occurs for these reasons:
Increased market share increases monopoly power and hence may allow more profit in LR
Managers prefer to work for bigger companies
Increasing market share may force rivals out of business
Describe social/ environmental concerns as an alternative aim for firms
A firm may incur additional expenses to choose products which don’t harm the environment or haven’t been tested on animals. Has proved to be a good marketing technique as it’s in some consumers interests
List the 6 types of efficiency
Productive efficiency Allocative efficiency X efficiency Efficiencies of scale Dynamic efficiency Social efficiency
What is productive efficiency?
When the economy is on the PPC, and at the lowest point of the SRAC curve
Describe allocative efficiency
Occurs when goods and services are distributed according to consumer preferences, at an output where P=MC
Describe X efficiency
Where firms have incentives to cut costs and use the optimal combo of factor inputs, so actual costs are as low as possible
Describe efficiencies of scale
Where a firm produces on the lowest point of its LRAC and hence benefits fully from economies of scale
Describe dynamic efficiency
Efficiency over time. Eg firms introducing new technology and reducing costs
Describe social efficiency
Includes all external costs and benefits, where social marginal costs = social marginal benefit
What is a competitive market?
Where no one firm has a dominant position, but the consumer has plenty of choice, so there are low prices, few barriers to entry and low profit, with several firms in the market
Describe the 5 features of perfect competition
Many firms
Freedom of entry and exit, requiring low sunk costs
All firms produce an identical product
A firms demand curve is perfectly elastic
Perfect information and knowledge
List 5 disadvantages of perfect competition
No scope for economies of scale, as the industry involves many small firms producing small quantities
Undifferentiated products give little choice to consumers
Lack of supernormal profit may make investment in R&D unlikely
If externalities occur, there is likely to be market failure without govt intervention
