Revenues, costs, profits Flashcards
Total revenue
- Amount of money a firm earns from selling a certain quantity of goods/services at a given price
TR = PxQ
Average revenue
-Revenue generated from each individual unit sold
AR=TR/Q
Marginal revenue
-Additional revenue generated from selling one more unit of a product
MR = change in TR / change in Q
PED and its relationship to revenue
ELASTIC DEMAND: opposite direction
-PED>1
-Lower price = TR increases
-Percentage increase in quantity sold is greater than decrease in price
UNITARY ELASTIC DEMAND:
-PED=1
-No change
INELASTIC DEMAND: same direction
-PED<1
-Low price = TR decreases
-Percentage increase in quantity sold is less than decrease in price
Types of costs
-TC = TFV + TVC
-TFC remain constant and don’t change with output
e.g land, machinery
-TVC changes with output level
e.g labour, raw materials
-ATC = TC/Q of output
(F/V)
-MC = Change in TC / Change in Q
Marginal cost
-When less than ATC, ATC is decreasing
-When more than ATC, ATC is increasing
-MC=ATC, ATC is at its minimum point
Total and marginal product
-TP - Total quantity of output produced as a function of variable inputs
-MP - Change in total product as a result of increase in one unit of variable input
Relationship between short and long run cost curves
-In the long-run firms aim to produce at the lowest cost, so the long run AC curve is an envelope of all possible short run AC curves
-The LAC curve is a tangent to the lowest point on the SAC curve at all output levels
-LAC curve is flatter so more efficient - represents firms ability to adapt and make optimal choices regarding input combinations and scale of production in the long run
Economies of scale
-Advantages of large scale production
-Produce at lower average costs
-Can experience increasing returns to scale
-small increase in inputs lead to large increase in output
Types of economies of scale
TECHNICAL ECONOMIES:
-A firm can produce goods more efficiently as scale of production increases
-Occurs from
specialisation of labour
better utilisation of machinery
R+D
MANAGERIAL ECONOMIES:
-Large companies can afford specialised management teams
-Better coordination/ efficient decision making
-cost savings
MARKETING ECONOMIES:
-Larger firms have more access to marketing and advertisement - lower average costs for this
-more market presence
FINANCIAL ECONOMIES:
-More favourable financing options
-Lower interest rates on loans
-Better terms from suppliers
-Due to size and financial stability - low risk
RISK-BEARING ECONOMIES:
-better equiped to handle market fluctuations
-operate in range of different markets
-Reduce cost of risk management
Types of Diseconomies of scale
MANAGERIAL:
-management structure overly complex/ less efficient
-difficult to communicate
COORDINNATION CONTROL:
-Struggle to maintain effective control over many departments
WORKER ALIENATION:
-Employees may feel disconnected from goals and values
-lower productivity
-high turnover rates
Minimum efficient scale
-The level of production a firm achieves the lowest long-run average cost per unit of output
-Minimum level at which a business can still fully exploit economies of scale
-Highly competitive
Depends;
-Tech
-production process
-demand
Internal economies of scale
-Cost advantage a single firm can achieve as it grows - specific to individual firm
-Cost savings a result of factors under the firms direct control - improved production process/ labour specialisation
External economies of scale
-Cost advantage multiple firms enjoy as the industry grows
-Factors beyond control of a single firm - availability of labour/ infrastructure development
Conditions for profit maximisation
Short run:
-MC=MR
-The firm should continue producing as long as the additional revenue from producing one more unit of a good is greater than the additional cost
Long-run under perfect competition:
-P=MC=MR
