Revenue, Costs and Profits Flashcards
What is total revenue?
Total earnings per period from the sale of output
How do we calculate total revenue?
Price x quantity
What is average revenue?
Total revenue divided by quantity
What is marginal revenue?
The addition to TR from selling one more unit of output
How do we calculate marginal revenue?
Change in total revenue / change in the no. of units sold
How can we describe the marginal revenue curve?
It is twice as steep as the demand (=AR) curve. It =0 at unit elastic price. It is positive as long as the price elasticity of demand is elastic and if it is negative, as long as the price elasticity of demand is inelastic
How do we calculate total profit?
Total revenue - total cost
What is normal profit?
Occurs when total revenue = total costs
What is abnormal profit?
Occurs when total revenue is greater than the total costs
What is loss?
When total costs are greater than total revenue
What happens if MR > MC?
Then producing and selling one more unit adds more to revenue than to costs. Profits will increase
What happens if MR < MC?
Then producing and selling one more unit adds more to costs than revenue. Profits will decrease
Where is maximum profit?
When MR = MC
What happens to production in the short-run?
It will be produced as long as some of the fixed costs are recovered by total revenue.
Why might production not be produced in the short-run?
If nothing of the fixed costs are recovered by total revenue
What is the short-run shutdown point?
When total revenue equals total variable costs
Why might production not be produced in the long-run?
When the total costs are not recovered by total revenue
What is the long-run shutdown point?
Is called the break-even point
What are business objectives?
Maximised profits, maximised total revenue and growth maximisation
Why do we maximise profits?
Profits are used to invest in the future
What are some reasons to maximise profits?
Source of internal finance, benchmark of success, connected to managers’ salaries and increase of share price
What are some problems we encounter trying to maximise profits?
Not all information is known, different interest groups and different objectives of managers and owners
Why do we maximise total revenue?
Higher profile, connected to managers salaries
Why do we have growth maximisation?
To make the business as large as possible and to produce at the highest possible level where total cost equals total revenue
