theme 3- 3.3 revenues, costs and profits

Question 1

price maker firms

Answer 1

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

Question 2

price maker TR curves

Answer 2

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

Question 3

price taker firms

Answer 3

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

Question 4

price taker TR curves

Answer 4

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

Question 5

average revenue (AR)

Answer 5

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

Question 6

price taker AR curve

Answer 6

horizontal curve (points meet axis)

Question 7

price maker AR curve

Answer 7

downwards sloping curve (points meet axis)

Question 8

marginal revenue (MR)

Answer 8

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

Question 9

price taker MR curve

Answer 9

is horizontal and = AR curve

Question 10

price maker MR curve

Answer 10

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

Question 11

PED and revenue

Answer 11

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

Question 12

costs

Answer 12

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

Question 13

normal profit

Answer 13

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

Question 14

total cost (TC)

Answer 14

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

Question 15

TC, TFC and TVC on a graph

Answer 15

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

Question 16

average cost (AC/ATC)

Answer 16

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

Question 17

average fixed cost (AFC)

Answer 17

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

Question 18

average variable cost (AVC)

Answer 18

variable cost per unit
= TVC /
Q

Question 19

MC, AC and AVC on a graph

Answer 19

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

Question 20

marginal cost (MC)

Answer 20

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

Question 21

relationship between MC and AC

Answer 21

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

Question 22

the law of diminishing marginal returns

Answer 22

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

Question 23

total product (TP)

Answer 23

total output of a firm in a given period of time

Question 24

average product (AP)

Answer 24

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

Question 25

marginal product (MP)

Answer 25

the change in output resulting from employing one more unit of the variable factor
= change in TP /
change in quantity

Question 26

relationship between AP, MP, AC and MC

Answer 26

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

Question 27

relationship between short run and long run AC curves

Answer 27

in the long run, all resources are variable
the LRAC curve is derived as a tangent to the 4 SRAC curves

Question 28

economies of scale

Answer 28

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

Question 29

example internal economies of scale

Answer 29

• 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

Question 30

minimum efficient scale (MES)

Answer 30

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

Question 31

constant returns to scale

Answer 31

occurs when an increase in the scale of production results in an exactly proportional increase in output
means the LRAC curve will be horizontal

Question 32

diseconomies of scale

Answer 32

occurs when an increase in the scale of production results in a less than proportionate increase in output, causing a rise in LRAC

Question 33

sources of diseconomies of scale

Answer 33

• 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

Question 34

external economies of scale

Answer 34

cause the LRAC curve to move downwards without any action of the firm itself
is a positive externality of production

Question 35

types of external economies of scale

Answer 35

• 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

Question 36

external diseconomies of scale

Answer 36

cause the LRAC to move upwards

Question 37

types of external diseconomies of scale

Answer 37

• higher costs e.g. rent if a region is attractive
• congestion
• increased demand for resources -> higher unit costs for labour, raw materials etc.

Question 38

profit

Answer 38

reward for risk taking
the difference between revenue and costs

Question 39

profit maximisation

Answer 39

occurs where the firm cannot increase its profits whether by increasing/decreasing output/price

Question 40

profit maximisation on a graph

Answer 40

the PM point is where MC = MR and where marginal profit = 0
is also the output with the greatest difference between TC and TR

Question 41

supernormal profit

Answer 41

profit above the normal profit required to stay in business
is the difference between TR and TC / AR and AC

Question 42

loss

Answer 42

occurs when a firm’s TC > TR / AC > AR
doesn’t automatically shut down if there is a loss

Question 43

break even level of output

Answer 43

where no supernormal profits or losses are made
when TC = TR / AC = AR

Question 44

the shut down point

Answer 44

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