Profit, Aims and Efficiency Flashcards
total revenue
total income a firm receives
this will equal the price * quantity
average revenue
TR÷Q
marginal revenue
the increase in revenue from selling an extra unit
profit
TR-TC or AR-AC
profit maximisation
- occurs when the difference between TR-TC is the greatest
- also occurs at an output where MR=MC
- if MR>MC, total profit is increasing
- if MR
normal profit
occurs when TR=TC. This is the breakeven point for a firm. It is the minimum level of profit required to keep the firm in the industry in the long run
supernormal profit
occurs when TR>TC
alternative aims of firms (3)
1-profit satisficing: managers make enough profit to keep owners happy and then prioritise workplace enjoyment
2-growth maximisation: firms may seek to increase market share, even at the expense of profit (may force rivals out of business, lead to bigger salaries and increase monopoly power leading to higher prices)
3-social/environmental concerns
types of efficiency (6)
- productive
- allocative
- X
- efficiencies of scale
- dynamic
- social
productive efficiency
occurs when the economy is on the PPC, also occurs at the lowest point on SRAC curve
allocative efficiency
occurs when goods and services are distributed according to consumer preferences. Can occur at output P=MC
X efficiency
occurs when firms have incentives to cut costs and use the optimal combination of factor inputs. Thus, actual costs are as low as possible. X-ineffiency means actual costs are high than potential
efficiencies of scale
occurs when firms produce on the lowest point of its long run average cost, and therefore benefits fully from economies of scale
dynamic efficiency
refers to efficiency over time; e.g. a firm introducing new technology and reducing costs over time
social efficiency
this includes all external costs and benefits. Where social marginal cost=social marginal benefit
