T3 REVENUE COST AND PROFIT Flashcards
What is the formula for revenue
Price * quantity
What is the formula for average revenue
total revenue divided by output
What is the formula for marginal revenue
Change in total revenue divided by the change in output
What is the formula for average fixed cost
TFC / Q
Describe the look of the average fixed cost curve
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TFC and AFC are only relevant in:
the short run
What is meant by diminishing marginal returns
In the short run, as more factors are employed, the marginal returns from these factors will eventually decrease
Explain why the marginal cost (MC) curve goes down and then up
MC decreases because initially workers will specialise, increase productivity and decreasing marginal cost.
MC will then increase because diminishing marginal returns will set in, which will decrease productivity and increase marginal cost.
How do we calculate average variable cost
TVC / Q
What does avc graph look like
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Describe the MC & AVC relationship
When MC is below AVC, AVC will decrease
When MC is above AVC, AVC will increase
When MC = AVC, AVC is at its lowest
Average fixed cost is always falling because as quantity increases:
Total fixed cost is spread across more units
how do you work out average total cost 2 ways
TC/Q or AVC + AFC
describe the look of the srac and subsequent lrac curves
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describe internal economies of scale
Reductions in long run average cost, as a firm’s size increases
What are the 6 types of internal economies of scale
risk-bearing economies
purchasing economies
technical economies
managerial economies
marketing economies
financial economies
What are v
When firms expand and make bigger purchases and can negotiate lower prices and reduce their LRAC.
What are technical economies
when big firms invest in specialist capital to Increase their productivity, and decrease their LRAC
What are managerial economies?
When big firms hire specialist managers, increasing a firm’s productivity and decreasing their LR average costs.
What are marketing economies?
When big firms spread their marketing costs across many units, decreasing their LR average costs.
What are financial economies?
When bigger firms are less risky, so they can secure cheaper loans, reducing their long run average costs.
As firms get bigger and less risky they can get loans at
lower interest rates
What are risk-bearing economies?
When big firms can use their big profits to diversify into new areas, reducing the cost of failure in one sector.
as companies get bigger, they can exploit internal economies to
Reduce their long run average costs
What is bureaucracy
an administrative, government, or social system with a hierarchical structure and complex rules and regulations.
What is internal diseconomies of scale
Internal diseconomies of scale lead to a rise in long run average cost, as a firm expands.
What Types of internal diseconomies of scale 3
Alienation, bureaucracy and communication
What is alienation
Workers feel alienated in very large firms, like they’re just another cog in the machine. This leads to demotivation, decreasing productivity, increase LRAC.
What is bureaucracy in the context of diseconomies of scale
Bureaucracy is all the paperwork, managers, filing and secretaries that a firm has to pay for when it expands, increasing LRAC.
What is communication in economics of scale
In big firms, employees may argue with each other and communication will be slow because big firms have so many layers. These factors will reduce productivity, increasing LRAC.
What cost must be included when calculating profit in economics
opportunity cost
What is normal profit
where TC ( including opp cost) = TR
What if a business is making less than normal profit?
It will leave the market, because it’s no longer covering its opportunity cost
What is supernormal profit
When TR > TC
What is average revenue equal to
Price
Describe the look of the cost and revenue diagram
What is marginal revenue
Marginal revenue is the additional revenue from selling one extra unit.
What is marginal cost
Marginal cost is the additional cost of producing one extra unit.
How do we represent Profit on a cost and revenue diagarm
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At a high price of is demand for Apple Airpods likely to be elastic or inelastic
elastic
If MR is positive, demand will be:
Demand is elastic along the top half of the curve where marginal revenue is positive.
What is meant by Revenue maximisation
A firm’s total revenue is maximised when MR = 0
Typically as As price decreases, demand will become more:
inelastic
When marginal revenue equals zero what can be said about TR and demand
Total revenue is maximised and demand is unitary.
What is the minimum efficient scale?
The minimum efficient scale is where a firm first reaches its lowest LRAC.
What are external economies of scale?
Reductions in long run average cost, as industry output increases
Write the definition of: External economies of scale: lower recruitment costs
When an industry expands, lots of specialist workers will be move to that area to find work.
This makes it easier to recruit workers, reducing a firm’s recruitment costs, decreasing their LRAC.
What is meant by external economies of scale: knowledge transfers
When an industry expands, knowledge will be transferred between firms.
This helps firms learn more effective new production techniques, decreasing their LRAC.
What is the average revenue curve equal to
demand curve
at what quantity is revenue maximised
when MR = 0
As price goes down along the demand curve what happens to the elasticity?
Elasticity changes from elastic to unitary to inelastic.
why is demand elastic at higher prices
At higher prices, a % change in price will have a bigger impact on demand so consumers will be more responsive
Why is demand inelastic at lower prices
At lower prices, a % change in price will have a smaller impact on demand so consumers will be less responsive
If demand is inelastic, an increase in price will have what effect on total revenue
increase total revenue, because quantity will fall by a smaller %.
if demand is inelastic what effect will a decrease in price have on revenue
decrease total revenue, because quantity will increase by a smaller %
if demand is elastic, what effect will a decrease in price have on revenue
increase total revenue, because quantity demanded will increase by a larger %
if demand is elastic what effect will a increase in price have on revenue
decrease total revenue, because quantity demanded will fall by a larger %
What is a short run shut down point
When Price/AR = AVC
What is the long run shut down point
Price = ATC
