Theme 3:3.3- Revenues, costs and profits Flashcards
what is revenue?
the income that a firm receives from the sale of a good or service to its customers.
formula for total revenue.
price x quantity sold
formula for average revenue.
total revenue/quantity
formula for marginal revenue.
change in total revenue/change in total quantity
definition of average revenue.
income for each unit sold.(price)
define marginal revenue.
income from selling an additional unit of output(difference between total revenue at diff levels of output)
why is AR=MR=D for price takers ?
they accept the ruling market price and will sell each unit at the same price.
why is the AR curve downward sloping for price makers?
because price makers have some pricing power
what are fixed costs and give an example?
costs which are paid regardless of output .e.g. rent, machinery
what are variable costs and give an example?
costs which change as output increases e.g. raw materials, wages, delivery
what is the difference between short run costs and long run costs?
in the short run at least one FOP is fixed(usually land, capital)whereas in the long run all FOP are variable
total cost formula.
total cost=total fixed cost+total variable cost
average fixed cost formula.
average fixed cost= total fixed cost/output
average variable costs formula.
average variable costs= total variable cost/output
average total cost formula.
average total cost=total cost/output
marginal cost formula.
marginal total cost=change in total cost/change in output
what is the minimum efficient scale(MES) and what does is equal?
the minimum output where production is most efficient and it is equal to productive efficiency
when does productive efficiency occur?
when production occurs at the lowest average cost (lowest point on AC curve)
what are economies of scale?
when long run average costs reduce as output increases
what are the internal economies of scale?
Risk bearing
Financial-cheaper loans
Managerial-bring expertise
Technical
Marketing-buying ads in bulk
Purchasing
what are the external economies of scale?
-better transport/infrastructure
-R&D firms move closer
-Suppliers move closer
-being close to similar businesses who can work together
define diseconmies of scale.
when average costs increase as firms grow too big and as output increases
what is the reason why diseconomies of scale occur?(3C’s and M)
control-as businesses get larger managers job is harder and workers begin to slack off cos they know they aren’t being watched
communication-messages get diluted from the top to the bottom
coordination-coordination is hard as diff parts of business have different aims.
motivation-workers may feel inferior and irrelevant in a big firm and believe they don’t have a purpose to work hard
define normal profit.
the minimum level of profit required to keep the FoP currently in use in the long run
define supernormal profit.
any profit that is in excess of normal profit
why is normal cost included in the average costs of a business?
because it represents the opportunity cost of capital invested in a business
when should a firm continue production?
when AR>=AVC
when should a firm stop production?
when AVC>AR
where is the point of profit maximisation on the graph?
when MR=MC
Define subnormal profit
When a loss is made as it is below normal profit AVC>AR
draw a SR shut down point in perefct comp
draw a SR shut down point monopolistic comp/the rest of the markets
draw a LR production continuation diagram for perfect comp
draw a LR production continuation diagram for monopolistic comp
