Topic 3: Revenues, Costs and Profits Flashcards
How do you calculate total revenue?
Price x quantity sold
Marginal revenue
The extra revenue a firm earns from the sale of one extra unit. When marginal revenue us 0, total revenue is maximised.
Where on a diagram is marginal revenue shown?
MR = 0 on the revenue diagram directly below the midpoint of the AR curve.
Average revenue
The average receipt per unit. TR / quantity sold AKA The price each unit is sold for.
What does the AR curve look like in markets when firms are price takers?
The AR curve is horizontal as this shows the perfectly elastic demand for their goods. As the demand curve shows the relationship between price and quantity. Average revenue = marginal revenue.
What does the AR curve look like in markets when firms are price makers?
The AR curve us downward sloping.
How do you calculate total cost?
Total costs = Total variable costs + total fixed costs
How do you calculate total fixed costs
Fixed costs do not vary with output
How do you calculate average total costs
total costs / quantity produced
How do you calculate average fixed costs
total fixed costs / quantity
How do you calculate average variable costs
total variable costs / quantity
Marginal costs
How much it costs to produce one extra unit.
Change in TC / Change in Quantity
The law of diminishing marginal productivity
- Adding more units of a variable input to a fixed input, increases output at first.
- However, after a certain number of inputs are added, the marginal increase of output becomes constant.
- Then, when there is an even greater input, the marginal increase in output starts to fall.
Draw what happens on a cost revenue diagram with diminishing returns
- MC, ATC and AVC rise with diminishing returns.
- AFC falls with increasing output.
The Lowest points (the yellow highlighted circles) are the points where diminishing marginal productivity sets in. Before this AC are falling and after this AC are rising.
Draw a diagram to show the relationship between Short run and long run average cost curves.
- The lowest point is the minimum efficient scale. This is where the optimum level of output is since costs are lowest.