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.
Show the relationship between SRAC curve and the LRAC curve on a diagram
The LRAC curve envelopes the SRAC curve, and it is always equal to or below the SRAC curve. The LRAC curve shifts when there are external economies of scale, i.e. when an industry grows.
What are the 6 different types of internal economies of scale?
(really fun mums try making pie)
- Risk-bearing
- Financial
- Managerial
- Technological
- Marketing
- Purchasing
External economies of scale
These occur within an industry when it gets larger. Eg local roads might be improved, so transport costs for the local industries will also fall. Also there might be more training facilities or more research and development, which will also lower average costs for firms in the local area.
What are the 3 types of diseconomies of scale?
Control- becomes harder to monitor how productive the workforce is, as the firm becomes larger.
Coordination- It is harder and complicated to coordinate every worker, when there are thousands of employees.
Communication- Workers may start to feel alienated and excluded as the firm grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation.
Normal profit
The minimum reward required to keep entrepreneurs supplying their enterprise in the long run. It covers the opportunity cost of investing funds in the the firm and not elsewhere.
Supernormal profits
The profit above normal profits. This exceeds the value of opportunity cost of investing funds into the firm. When TR > TC
Losses
A firm makes a loss when they fail to cover their total costs.
When might a firm choose to continue operating in the short run?
P > AVC
What is the short run shut down price?
When variable costs cannot be covered. This is at the lowest point of the AVC curve. P < AVC.
What is the long run shut down price?
TR < TC
Draw a diagram to illustrate when a firm would shut down in the short run
- This diagram shows how the revenue curves lie below the cost curves.
- Therefore, P < C. The rectangle formed shows the area of loss.
- At a price of P and an output of Q, the firm would shut down in the short run.
