theme 3- 3.3 revenues, costs and profits Flashcards
price maker firms
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
price maker TR curves
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
price taker firms
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
price taker TR curves
its TR curve will be a straight / line from the origin
average revenue (AR)
the price the firm receives per unit sold
AR curve = demand curce
= TR /
Q
can be seen that AR = price
price taker AR curve
horizontal curve (points meet axis)
price maker AR curve
downwards sloping curve (points meet axis)
marginal revenue (MR)
the change in TR from selling one extra unit
= change in TR /
change in quantity
price taker MR curve
is horizontal and = AR curve
price maker MR curve
is downward sloping, with a gradient 2x as deep as the AR curve
PED and revenue
when MR is positive, demand is elastic
when MR = 0, demand is unitary
when MR is negative, demand is inelastic
costs
the payments that firms make for the use of the factors of production
normal profit
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
total cost (TC)
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
TC, TFC and TVC on a graph
TC = s shape originating from the price
TFC = horizontal line from the price
TVC = identical s shape as TC from the origin
average cost (AC/ATC)
cost per unit of output
= TC /
Q
initially falls as more is produced as the fixed cost is spread over more units
average fixed cost (AFC)
fixed cost per unit of output - must always fall as output increases
= TFC /
Q
average variable cost (AVC)
variable cost per unit
= TVC /
Q
MC, AC and AVC on a graph
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
marginal cost (MC)
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
relationship between MC and AC
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
the law of diminishing marginal returns
states that as more units of a variable factor are added to a fixed factor, the increase in output eventually falls
total product (TP)
total output of a firm in a given period of time
average product (AP)
the unit of output produced per unit of a variable factor of production
= TP /
Q
marginal product (MP)
the change in output resulting from employing one more unit of the variable factor
= change in TP /
change in quantity
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
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
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
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
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
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
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
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
external economies of scale
cause the LRAC curve to move downwards without any action of the firm itself
is a positive externality of production
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
external diseconomies of scale
cause the LRAC to move upwards
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.
profit
reward for risk taking
the difference between revenue and costs
profit maximisation
occurs where the firm cannot increase its profits whether by increasing/decreasing output/price
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
supernormal profit
profit above the normal profit required to stay in business
is the difference between TR and TC / AR and AC
loss
occurs when a firm’s TC > TR / AC > AR
doesn’t automatically shut down if there is a loss
break even level of output
where no supernormal profits or losses are made
when TC = TR / AC = AR
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
