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Econ - T3 - Micro > Revenues, Costs and Profits > Flashcards

Revenues, Costs and Profits Flashcards

1
Q

What is Price Maker?

A

a firm that has enough market power to influence the price of a good and faces a downward sloping D Curve

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2
Q

What is a Price Taker?

A

A firm that has to sell its good at the same price as other, doesn’t have enough market power to influence the Price

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3
Q

What is Total Revenue?

A

Amount of Money a firm receives
- Q x P

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4
Q

What is the shape / draw the TR curve of a Price taking firm + why?

A
  • TR Curve straight line sloping upwards that goes through origin
  • Operating in a very competitive market –> must accept market-determined price for products.
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5
Q

What is / draw the shape of a TR curve for price making firms +why?

A
  • Upside down U (parabola) starting from origin
    –> as price falls, revenues will rise (at a decreasing marginal rate) until a point of maximum revenue, then as price falls the TR will also fall
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6
Q

What is Average Revenue + formula?

A
  • Price the firm receives per unit sold
  • AR curve = D curve

AR= TR/Q
AR = PxQ / Q

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7
Q

What is the difference between a Price Makers AR curve and a Price Takers AR curve

A

Maker
- Downward sloping curve

Taker
- Horizontal (-) perfectly elastic curve

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8
Q

What is Marginal Revenue + formula?

A
  • Change in total Revenue from selling one more unit

MR= △TR/ △Q

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9
Q

What is the difference between a Price Makers MR curve and Price Takers MR curve?

A

Maker
- MR curve downward sloping, has gradient twice as steep as AR curve (half the D curve)

Taker
- MR is horizontal (-) equal to AR curve

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10
Q

What is the relationship between PED and revenue?

A
  • If D is Price Inelastic, (below 1) MR= Negative
    –> TR will move in direction of price change
    –> (e.g. TR go up if price increase, TR go down if price decrease)
  • If PED = Unitary (PED = 1) MR = 0
    –> TR doesn’t change
  • If PED Elastic (Above 1) MR = Positive
    –> TR moves opposite direction to Price
    –> (e.g. cut Price –> ↑TR)
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11
Q

What is the formula for PED?

A

%△Qd / %△P

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12
Q

What is Total Cost + equation in SR?

A
  • TC = Cost of producing at given output
    TC = TVC + TFC
    –> Total Fixed costs = costs do not change with output e.g. rent for building
    –> Total Variable Costs = Costs do vary with output e.g. materials
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13
Q

Draw + Explain Total Fixed Costs curve + Total Variable Costs curve

A

TFC
- Straight horizontal line, across X-Axis Output , Y-Axis Cost

TVC
- Starts at Origin
- Inverse S (look up if don’t know)
–> increases then flattens then increases again but with smooth lines

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14
Q

What is Average Cost + Formula?

A

Cost per unit of output
AC= TC/Q
–> AC falls as Q increases as Fixed Costs spread over more products

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15
Q

What is Average Variable Costs + Formula

A

Variable cost per unit of output
AVC = TVC/Q

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16
Q

What is Average Fixed Costs Formula?

A
  • AFC = TFC/Q
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17
Q

Draw AVC + MC + AC curves on a graph

A

MC = looks like a J Curve
AC = U curve starts starts high doesn’t end that high
–> trough of curve goes through MC
AVC = roughly follows AC, trough through MC, below AC, doesn’t start as high

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18
Q

What are Marginal Costs + Formula

A
  • Costs to firm of making one more unit of output
    MC = △TC/ △Q
    –> decides gradient of TR curve
    –> MC curve = the J looking curve
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19
Q

Relationship between MC (Marginal Cost) and AC (Average Costs)

A
  • MC curve crosses AC curve at its lowest point
  • When MC is below AC, cost of producing extra unit is below average cost of producing a unit
    –> Extra unit ↓AC
  • When MC above AC, cost of producing extra unit more than average cost of producing a unit
    –> extra unit ↑AC
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20
Q

Define the Short run Vs. Long run?

A

SR - Period of time where at least one FoP is fixed (Factor of production)

LR - Period of time where all FoP are variable

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21
Q

What is the Law of Diminishing returns?

A
  • as more variable factors of production are added to fixed factors of Production, the increase in output eventually falls
    –> only applicable in SR as in LR all FoP are variable

e.g. if more workers are added to a same size room, come a point where too many workers for room, adding workers will slow output down / decrease output instead of increasing

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22
Q

What is Average Production + Formula?

A
  • Unit of output produced per unit of variable factor of production
    AP= TP (total Product) / Q
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23
Q

What is Marginal Product + Forumla?

A
  • Change in output resulting from one more unit of variable factor
    MP = △TP (Total Product) / △Q
24
Q

Relationship between MP curve and MC curve

A

Marginal Product
Marginal Costs
- As MP rises MC falls –> as MC rises MP falls

25
Q

Relationship between AP and AVC

A

Average Product
Average Variable Costs
- As AP rises AVC falls, As AVC rises AP falls

26
Q
A
27
Q

What are Economies of Scale?

A

EOS
- When an increase in scale of production results in large increase in output, causing a fall in LR Average Costs

28
Q

Internal Vs. External EOS

A

Internal
- LR Average Costs of production decrease as firms size increases

External
- When LR Average Costs of Production decrease as whole industry / market a firm is in size increases e.g. AI

29
Q

What are 6 examples of Internal EOS

A
  • Technical EOS –> e.g. larger warehouse, larger shop able to hold much more
    –>Larger companies will own the machine as opposed to renting them
  • Marketing EOS –> cost of advertising spread over larger output / consumers e.g. Virgin ads Media, plane, gym in one
  • Commercial EOS –> bulk-buying e.g. Walmart , P↓, Profit↑
  • Managerial EOS –> Larger firms ↑Efficiency, highly skilled, specialised managers
  • Financial EOS–> more collateral to borrow against, lower interest rates due to lower risk
    –> - If a larger company needs liquidation it can sell shares.
    –> contributes to lower AC
  • Risk-bearing EOS –> spread risk through diversification. e.g. Mars owning chocolates, pet food, rice.
30
Q

What is Diversification?

A
  • Firm increases range of goods or markets to reduce risk
31
Q

What are Diseconomies of Scale?

A
  • DOS
    –> Increase in scale of production results in reduced increase, or decrease, of output –> ↑LRAC
32
Q

What are some causes of DOS?

A
  • X-inefficiency –> lack of competition for large firm means costs allowed to rise –> little incentive for firm to minimise costs
  • Poor communication –> communication between manager / owners and workers become complex e.g. ↑Bureaucracy –> delays in info –> productivity ↓
  • Principles-Agent Problem –> divorce from ownership + control (different gals between CEO [long-run] + managers [short-run])
  • Demotivation –> large business often impersonal, ↓Efficiency of workers –> Productivity ↓
  • Poor co-ordination –> e.g. different timezones, cultures countries –> productivity ↓ –> AC ↑
33
Q

Name 3 factors contributing to External EOS

A
  • University programs –> e.g. partnership between Standford + Apple (benfits both)
  • Infrastructure –> Gov providing infrastructures / subsidies
  • Popularity e.g. AI popular
34
Q

2 Reasons of External DOS?

A
  • Higher Rent in certain areas
  • As Industry grows D for materials / workers / machinery increases
35
Q

What is Profit?

A
  • TR-TC
  • reward for risk taking
36
Q

What is the point Profit Maximisatoin occurs?

A
  • MR=MC or Marginal Profit = 0
  • When a firm cannot increase profits further
    –> also be the output where TR-TC is largest
37
Q

What equation do you use to work out %Change

A

New Price - Original Price (P2-P1) / Original Price (P1)

x 100

38
Q

Formula for PED + inelastic vs elastic?

A

%△Qd / %△P

  • Inelastic = Less than 1
    Elastic = Greater than 1
    Perfectly / Unitary Elastic = 1
39
Q

3 types of Profit

A
  • Normal Profit , AR = AC - minimum money required for a firm to remain in business
  • Supernormal profits, AR>AC
  • Loses , AR<AC

(All use Economic profits)

40
Q

What are Economic Profits

A

Econ
Revenues - Economic (Implicit) Costs
- Implicit Costs e.g. Opportunity costs

Accounting
Revenues - Explicit Costs
- Explicit costs e.g. wages

41
Q

Productive Efficiency; Formula + Explanation?

A

MC= AC
(Marginal Costs = Average Costs)
( J curve = top U curve )
–> Minimum point on AC, Lowest Cost per unit

42
Q

Allocative Efficiency; Formula + Explanation?

A

P=MC
(Price = Marginal Costs [J curve] )
–> Price charged maximises social welfare, taking consumer + Producer welfare into account

43
Q

Normal Profit; Formula + Explanation?

A

TR=TC or AR=AC
–> Return is built into cost curve, just enough profit to keep business going –> represents Oppertunity Cost

44
Q

Profit Maximisation; Formula + Explanation?

A

MR = MC
Marginal Revenue = Marginal Costs
–> Marginal Profit = 0
–> Vertical difference between TR and TC is maximum

45
Q

Sales Maximisation

A

AC= AR
TR=TC
–> highest level of output at normal profits

46
Q

Revenue Maximisation; Formula + Explanation?

A

MR= 0
–> Maximum total Revenue
Selling another unit adds same to TR as amount lost from units being sold at lower price

47
Q

Price taker; Formula (for graph) + Explanation?

A

AR=MR
- Perfectly elastic demand
–> TR is straight line through origin
AR + MR horizontal
PED infinite

48
Q

Price maker; Formula (for graph) + Explanation?

A
  • AR > MR
  • AR downwards sloping
    MR at twice gradient of AR (e.g. MR half of AR)
    –> firm has price-setting power
49
Q

Break-even; Where it is on graph + Explanation?

A

AR=AC
–> firm covers costs and makes only normal profits

50
Q

Shut down point; Where it is on graph + Explanation?

A

AR=AVC
–> Firm only covers AVC, makes loss
- If price above this but below AC, still a loss, but firm contributes to AFC so can carry on in SR

51
Q

What are the 5 types of Pricing Strategies

A
  • Predatory Pricing –> illegal (CMA) When prices are set below AVC to drive competitors out
  • Limit pricing –> prices are set below the profit maximising price but not so low losses are made (lower prices a lot but not to make loses)
  • Pricing-meet the objectives –> Profit Max (MR=MC), Revenue Max (MR=0), Sales Max (AR=AC) (diagram)
  • Cost-plus or Mark-up pricing –> firm calculates AC and add mark-up to make profits (used in irl)
  • Price Wars
52
Q

Explain Price wars (reasons for + company attitudes to it)

A
  • Firms want to avoid Price wars –> Profit↓

Reasons for price wars:
- Defend Market Shares (dif firm lowers price)
- To drive weaker competitors out market
- Existing firms defending market against new firm (prefatory pricing)

53
Q

Limit Pricing + Predatory pricing Evaluation (SR + LR etc.)

A
  • Short-run - benefits consumers (P↓) harms shareholders (revenue↓)
  • Long-run - harms consumers (P↑ - Og firm puts P back, eliminates possible innovation) benefits shareholders
  • Possible price wars
  • Anti-competitive behaviour (Predatory illegal CMA)
54
Q

Sales Maximisation explained + evaluation points (2 ben, two con)
(graph, evaluation)

A

Graph
- Q=P where AVC = AR / D

Evaluation
pros
- EOS↑ (than Profit Maximisation)
- ↑ Brand awareness–> Circulation of products

cons
- Dividends ↓
- Profits ↓Dynamic Efficiency

55
Q

What are the 6 type of buisness goals for a firm?

A
  • Profit Maximisation –> Q = (MR=MC) P= AR
  • Revenue Maximisation –> MR=0
  • Sales volume Maximisation –> AC=AR
  • Satisficing –> Principle agent problem
  • Growth Maximisation –> ↑EOS
  • CSR (Corporate Social Responsibility) –> community work / Charities
56
Q

Revenue Maximisation explained + evaluation points
(graph, assumptions, evaluation)

A

graph
- Q where MR (1/2 D) = 0
- P follow line up to D
- MR=0

Assumption
- Managers most interested in salary, boost revenue for company

Evaluation
pros
- P↓ (Market share↑) –> EOS↑ (than Profit Maximisation)
cons
- Profit for shareholders↓ (than profit max.)
- P↓ may be copied by other firms, Profits don’t increase by much

57
Q

What is Minimum Efficient Scale?

A
  • the output where LRAC first reach a minimum
    –> where internal EOS fully exploited

Econ - T3 - Micro (9 decks)

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