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edexcel a level economics > theme 3- 3.3 revenues, costs and profits > Flashcards

theme 3- 3.3 revenues, costs and profits Flashcards

1
Q

price maker firms

A

a firm that has sufficient market power to influence the price of the good
faces a downward sloping demand curve
is operating in an imperfectly competitive market

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2
Q

price maker TR curves

A

its TR curve is a parabola (n) shape
-> means that as price falls revenue rises, but rises slowly as price is cut to the point of maximum revenue, which causes TR to fall

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3
Q

price taker firms

A

a firm that has to offer goods at the same price of everyone else in the market
is operating in a perfectly competitive market, must accept market determined price

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4
Q

price taker TR curves

A

its TR curve will be a straight / line from the origin

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5
Q

average revenue (AR)

A

the price the firm receives per unit sold
AR curve = demand curce
= TR /
Q
can be seen that AR = price

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6
Q

price taker AR curve

A

horizontal curve (points meet axis)

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7
Q

price maker AR curve

A

downwards sloping curve (points meet axis)

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8
Q

marginal revenue (MR)

A

the change in TR from selling one extra unit
= change in TR /
change in quantity

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9
Q

price taker MR curve

A

is horizontal and = AR curve

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10
Q

price maker MR curve

A

is downward sloping, with a gradient 2x as deep as the AR curve

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11
Q

PED and revenue

A

when MR is positive, demand is elastic
when MR = 0, demand is unitary
when MR is negative, demand is inelastic

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12
Q

costs

A

the payments that firms make for the use of the factors of production

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13
Q

normal profit

A

inc in costs, is the reward for risk taking
represents the amount that the risk taker must receive to keep resources in their current use

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14
Q

total cost (TC)

A

the cost of producing at a given level of output
consists of:
total fixed cost (TFC) e.g. rent
+
total variable cost (TVC) e.g. raw materials

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15
Q

TC, TFC and TVC on a graph

A

TC = s shape originating from the price
TFC = horizontal line from the price
TVC = identical s shape as TC from the origin

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16
Q

average cost (AC/ATC)

A

cost per unit of output
= TC /
Q
initially falls as more is produced as the fixed cost is spread over more units

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17
Q

average fixed cost (AFC)

A

fixed cost per unit of output - must always fall as output increases
= TFC /
Q

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18
Q

average variable cost (AVC)

A

variable cost per unit
= TVC /
Q

19
Q

MC, AC and AVC on a graph

A

MC is a curved tick shape that cuts through the lowest point of the AC curve
AC is a u shape with its trough to the right
AVC is a flatter u shape below AC but above MC

20
Q

marginal cost (MC)

A

the cost to the firm of making one more unit of output
= change in TC /
change in quantity
the gradient of the TC curve is the MC

21
Q

relationship between MC and AC

A

when MC is below AC = cost of producing the next unit < average cost of producing a unit + vice versa
the MC curve, therefore, cuts through the lowest point of the AC curve

22
Q

the law of diminishing marginal returns

A

states that as more units of a variable factor are added to a fixed factor, the increase in output eventually falls

23
Q

total product (TP)

A

total output of a firm in a given period of time

24
Q

average product (AP)

A

the unit of output produced per unit of a variable factor of production
= TP /
Q

25
marginal product (MP)
the change in output resulting from employing one more unit of the variable factor = change in TP / change in quantity
26
relationship between AP, MP, AC and MC
when MP is rising, MC is falling + vice versa when AP is rising, AVC is falling + vice versa i.e. the lowest point of the cost curves are the highest point of the product curves can be seen that cost curves = opposite of product curves
27
relationship between short run and long run AC curves
in the long run, all resources are variable the LRAC curve is derived as a tangent to the 4 SRAC curves
28
economies of scale
occur when an increase in the scale of production causes a fall in long run AC internal- when a firm grows larger external- when a whole industry grows and firms benefit
29
example internal economies of scale
- technical economies- larger volumes of warehouse/retail space - marketing economies- bigger = cost of advertising spread across a large no. of potential customers - commercial economies- can bulk buy from suppliers = better deals and lower sales prices
30
minimum efficient scale (MES)
an output at which a firm's LRAC curve stops falling / the min output at which internal economies of scale are fully exploited is the point where the bottom of the ATC curve meets the LRAC curve
31
constant returns to scale
occurs when an increase in the scale of production results in an exactly proportional increase in output means the LRAC curve will be horizontal
32
diseconomies of scale
occurs when an increase in the scale of production results in a less than proportionate increase in output, causing a rise in LRAC
33
sources of diseconomies of scale
- X-inefficiency: as a firm gets bigger, admin costs may increase disproportionately - poor communication: leads to info delays between managers and workers - demotivation: large = impersonal - poor coordination: difficult to manage across countries
34
external economies of scale
cause the LRAC curve to move downwards without any action of the firm itself is a positive externality of production
35
types of external economies of scale
- improvements in transport that benefit all firms e.g. HS2 - industry itself attracts skilled labour- saves on training costs - new methods of production e.g. robot vacuums in the hotel industry - firms based in an advantageous area e.g. tech city in east london- benefits from transport, broadband, publicity from the govt
36
external diseconomies of scale
cause the LRAC to move upwards
37
types of external diseconomies of scale
- higher costs e.g. rent if a region is attractive - congestion - increased demand for resources -> higher unit costs for labour, raw materials etc.
38
profit
reward for risk taking the difference between revenue and costs
39
profit maximisation
occurs where the firm cannot increase its profits whether by increasing/decreasing output/price
40
profit maximisation on a graph
the PM point is where MC = MR and where marginal profit = 0 is also the output with the greatest difference between TC and TR
41
supernormal profit
profit above the normal profit required to stay in business is the difference between TR and TC / AR and AC
42
loss
occurs when a firm's TC > TR / AC > AR doesn't automatically shut down if there is a loss
43
break even level of output
where no supernormal profits or losses are made when TC = TR / AC = AR
44
the shut down point
where AR = AVC if AVC is not covered then the firm will close down in the short run on a graph, where AVC intersects the MC curve

edexcel a level economics (21 decks)

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