revenue cost profits Flashcards
total revenue meaning
total income gained from selling the firms output
total revenue = price x quantity
average revenue meaning
revenue per unit of output
AR = demand curve
average revenue = total revenue/ quantity
how does a graph look like with perfect competition
perfectly elastic demand curve
AR is horizontal in perfect competition as the firms have no price setting power
MR=AR=D
total revenue is upwards sloping as more goods are sold then more profits are made
how does a graph look like with imperfect competition
price decreases as output increases
AR curve is downwards sloping
firms have price setting ability
short run meaning
at least 1 factor of production is fixed
long run meaning
all factors of production are variable
total cost meaning
cost of producing at a given level of output
total fixed cost meaning
cost that do not change with the output and remain constant
e.g. rent, machinery, marketing
sunk cost meaning
fixed costs that cannot be recovered if the firm shuts down
total variable cost meaning
cost that change with output
e.g. materials, packaging
law of diminishing marginal productivity meaning
after a certain point adding more variable factors when other factors are fixed will cause fall in marginal output
marginal cost meaning
the cost of production one extra unit of output
economies of scale meaning
increase in output will lead to a decrease in average cost
diseconomies of scale meaning
increase in output will lead to an increase in average cost
minimum efficient scale meaning
minimum level of output for the firm to exploit economies of scale
where LRAC stops falling
causes of vertical shifts of LRAC
economies of scale cause a downwards shift as AC falls at every given point
increased tax- moves upwards as AC increases
new production technology- increases productivity- lowers AC
internal economies of scale meaning
occurs when firm grows larger and average COP falls as output increases
types of internal economies of scale
risk bearing- diversification in different markets to have other parts of the business to fall back on
financial- lower IR on loans for larger firms, more assets = less risk = cheaper access to credit
managerial- larger firms specialise, divide labour, have specialised employee
technological- larger firms = invest in better machinery/ capital increase productivity
purchasing- bulk buying raw materials for cheaper
technical- specialisation, research and development better quality
external economies of scale meaning
growth of the industry within which the firm operates independent to the firm itself
types of external economies of scale
agglomeration- firms in similar industries cluster together and attract skilled labour.
location/ travel- better transport, training courses,,
examples of diseconomies of scale
managerial- firms become too big, too many managers, slow decisions
workers may feel alienated
communication problems so wrong decisions made
higher costs
conflicts
inefficiency
large difference between highest paid worker and lowest paid worker = inequalities
ev for economies of scale
all businesses can exploit internal economies of scale so it may not give them an advantage
economies of scale can run out
pricing strategies can lead to economies of scale but can cause consumer welfare loss
small businesses can prosper even if there are large dominant firms
profits meaning
revenue - costs
normal profits meaning
minimum return needed to stay in business
supernormal profits meaning-
excess of normal profits
subnormal profits meaning
when firm fails to cover total costs
importance of profits
retained profits is a source of finance
increase in supernormal profits signals for new firms to join the market
rise in profits signals improvement in supply side policies
short run shut down point meaning
when a business is making a loss
when AVC is above AR
