Revenue and Profit and Market Structures (Long run and Short run) Flashcards
total revenue
TR
defined as the money collected from the sale of goods and services.
TR= PRICE * QUANTITY
Average Revenue
AR
the price at which the firm sells each unit of its output
AR= TR/Quantity
Marginal Revenue
MR
the change in total revenue from selling an additional/one more unit of output.
MR= change in TR/change in quantity
Normal profit
It is the minimum amount of profit needed to encourage a firm to continue production or stay in business in the long run.
when AR=AC
TC=TR
NORMAL PROFIT IS ADDED TO WAGES, RENT AND INTEREST TO GET TC SO WHEN TC = TR NORMAL PROFIT OCCURS
Abnormal profit or supernormal profit
refers to any profit earned in excess of normal profit
when AR > AC
AKA surplus profit and economic profit
subnormal profit
refers to when average costs exceed average revenue, aka a loss
Profit maximisation
when a firm takes advantage of any opportunity to earn additional profit.
Producers objectives are to maximise profits.
marginal profit
MR-MC
MR > MC
can produce and should sell more units of output
MC > MR
output of firm should be decreased
MC = MR
Profit maximisation
Other objectives: survival and sales maximisation
- a firm may set prices low to keep consumers from switching to other products as a result the firm will stay in business but it’s might be low.
- some firms may cut prices to encourage consumers to purchase their products, resulting in lower profits although increased market shares
In the short run,
the numer of firms in the market is fixed, no new firms can enter and exisiting ones cannot leave
Let’s assume perfect competition exists in the market for sweet peppers
since firms in perfect competition are price takers, the market price is 5 dollars and all firms sell their product at this price. Any firm that doesn’t sell at market price will not sell peppers, as consumers will just buy from the other firms in the market.
Under perfection competition in the short run where there is abnormal or supernormal profit
more firms will enter the market, HOWEVER THIS CAN ONLY OCCUR IN THE LONG RUN. As more firms enter the industry, supply increases causing market price to decrease
IF in short run, the firm is earning normal profit being that AR=AC then
no firms would be inclined to leave and no new firms would want to enter the market as no firm would like to suffer a loss. This represents equilibrium
SHORT RUN EQUILIBRIUM UNDER PERFECT COMPETITION SHOWING…
P=AR=MR=D
horizontal line from the price axis, demand for the good is equal to the market price, average revenue equals price and marginal revenue becuase the firm makes normal profit and average revenue is constant
If in the short run, a loss is incurred being AR is less than AC then
firms are inclined to leave the industry HOWEVER THIS CAN ONLY OCCUR IN THE LONG RUN. As firms leave the market, supply decreases and market price increases.
product optimum
Qo OR Qo
MC=AC
SHORT RUN EQUILIBRIUM
MC = MR
Marginal cost curve
Essentially, the supply curve of the firm that operates under perfect competition.
(makes normal profit wiling to price goods at market price as it covers all cost of production hence noraml profit and perfect comp)
perfect competiton does not
exist. In reality, it just theory brought up by economists
UNDER Monopoly, Oligopoly, Monopolistic competition
two curves AR (demand curve)
MR downard slopping
QE for monopolies, oligopolies and monopolistic competition
MR=MC=E=D=P
abnormal/supernormal profit
subnormal/loss
normal
ar is higher than ac
ac is higher than ar
ac same area as ar
why are monopolies and oligopolies criticised
because the quantity oligopolies and monopolies produce don’t correspond to the productive optimum. Oftentimes, they produce less than the productive optimum (max output) at the same price
monopolies always earn
supernormal profit so they hav EVERYTHING TWO PRICES FOR SHORT RUN/LONG RUN EQUILIBRIUM
MONOPOLISTICALLY COMPETITIVE FIRM
EARN ALL PROFITS HOWEVER IN NORMAL THEY HAVE PRODUCT OPTIMUM LIKE A MONOPOLY
MONOPOLIES DO NOT
PRODUCE AT PRODUCT OPTIMUM, there is not an efficient allocation of resources
kinked demand curve
collusive- they meet to determine prices cartel
non-collusive-obvi they do not
oligopolies- cane be kinked, MR is kinked and two MC curves are drawn through the MR
sticky prices are caused from this, meaning, price does not change/stays the same collusion occurs
