Production, costs and supply Flashcards
What is MR?
The change in total revenue for producing one more item.
How does the EoD impact MR and TR?
When demand is elastic MR is positive and when price decreases total revenue increases. When it is unit elastic there is no impact on TR and MR is 0. When demand is inelastic MR is negative and TR falls when price decreases.
What is the marginal revenue formula?
Change in total revenue / Change in quantity or MR = 1- (1/EoD)
Differentiate the demand function QD= 200 - P to give the MR?
Rearrange to find P = 200 - Q, multiply by Q as PxQ is TR so P = 200Q - Q(squared) and take the partial derivative for MR so P= 200-2Q
When is P=MR - what does this mean?
In perfect competition the price and MR curve is horizontal because firms can sell as much as they like at the market price so the price doesnt change with output.
What are total costs?
Fixed costs (costs that dont change with output) + variable costs (change with output)
What is unique about costs in the long run?
They are all variable.
Why is the variable cost curve upward sloping?
Due to the law of diminshing marginal returns - the more inputs added to a fixed factor will initally increase marginal returns as labour can specialise until it gets to a point where productivity falls and MR of extra worker falls.
What information is key when determining price?
Elasticity of demand and MC as EoD can be used to work out MR and firms will want to price where MR=MC at the profit max output.
Where is the profit max point on a TR and TC curve diagram?
Where the TR and TC curve is tangent - biggest gap between TC and TR.
Do fixed costs influence pricing decisions?
No, only changing costs influence the prices set. A firm with high fixed costs dont charge a high price to cover these costs, they incur such high fixed costs because they can charge high prices due to the EoD.
What factors other than MC/VC and EoD are considered when making pricing decisions?
Competitors, signals to consumers, sensitivity of consumers to certain prices e.g £4.99, bulk buying discounts means different prices for different number of units.
What reasons may firms not profit maximise?
Lack of information - where is MR=MC (esp in dynamic market)
Time period - may sacrifice SR profits for LR profits
Human behaviour - firms managers may act in self interest
Alternative aims - survival?Social aims?
What is short run and the long run?
Short run is where at least one FOP is fixed.
Long run is a period of time where all FOP are variable.
What is the long run shut down condition?
When the firm is making a loss TR<TC or ATR<ATC
