Profit Flashcards
What is accounting profit?
Total Revenue - Total (production) costs
What is economic profit
Accounting profit - opportunity cost
Value of the next best alternative foregone
Where on a total cost/total revenue graph is profit max
Largest gap between TR and TC
Why is it profit max when MC=MR
It is the last point at which MR is above has had the biggest increase in revenue.
Biggest difference between TR + TC
Shutdown conditions if AR is greater than ATC
Supernormal profit is being achieved - business should continue to operate
Shutdown conditions if AR is lower than ATC but above AVC
Would make more of a loss if shut down now - continue producing to minimise the loss
Shutdown in the long run
Shutdown conditions if AR is lower than ATC and AVC
Shut down NOW
Know how to draw a cost/revenue diagram
AR = D
MC = S
Profit maximising = MC = MR
x = Output
Know how to draw a perfect competition cost/revenue
Flat AR = MR
Conditions for a perfectly competitive market
- Lots of firms (all with a small market share)
- Perfectly homogenous goods (no differences)
- Price takers (no price making ability, flat AR curve)
- Perfect information
- No patents (entry or exit barriers)
- Agents act rationally
Examples of ‘perfectly’ competitive markets? (3)
- Gold
- Oil
- Currency
Why is a perfectly competitive market almost impossible?
There is always branding, service, ease, size of firms
Why is asymmetric information largely solved?
The internet
Can there be a shift in AR curve?
Yes - only in the short run
What is economic efficiency?
MC = AR
Marginal cost shows the cost of an additional unit of output, reflecting the value of an additional unit
Average revenue shows the Demand for that firms product (i.e price consumers are willing to pay), which reflects the MPB consumers receive from this additional unit.
