2.11b profit maximisation

Question 1

revenues

Answer 1

total revenue (tr) are the total payments firms receive when they sell the goods and services they produce
TR=PxQ, which is the price of the goods multiplied by the quantity of the sold goods

average revenue (AR) is revenue per unit of output sold
AR=TR/Q

marginal revenue (MR) is the additional revenue arising from the sale of an additional unit of output
MR=change in TR/change in quantity

Question 2

total revenues (TR)

Answer 2

TR = P x Q

are the total payments firms receive when they sell the G&S they produce

Question 3

Average revenue (AR)

Answer 3

revenue per unit of output sold
AR =TR/Q

Question 4

marginal revenue (MR)

Answer 4

is the additional revenue arising from the sale of an additional unit of output
MR = change in TR/change in Q

Question 5

revenue curves

Answer 5

y: revenue
x: output

Question 6

sr

Answer 6

short run(SR): a period of time when at least one factor of production is fixed

Question 7

total cost(TC)

Answer 7

all costs (economic costs) of production incurred by a firm

Question 8

average cost(AC)

Answer 8

cost per unit of output produced
AC = TC/Q
2dp in paper 2 and 3

Question 9

marginal cost (MC)

Answer 9

is the additional cost of producing an additional unit of output

MC = change in TC/change in Q

eg first unit $15, second unit $18,
my = (18-15)/1
=3

Question 10

law of diminishing marginal returns (LDMR)in the short run

Answer 10

is applicable to SR where there is at least one fixed factor
marginal return increases first then decreases when LDMR sets in
marginal cost decreases first then increases when LDMR sets in

when marginal < average , average will fall
when marginal = average, average will not change
when marginal > average, average will rise

Question 11

Economies Of Scale (EOS)

Answer 11

EOS is defined as cost savings due to increased scale of production in the LR EOS is seen as movement downward along the LRAC curve

Question 12

sources of EOS

Answer 12

a)
Specialisation of labour
Each worker specializes in performing tasks that make use of skills, interests & talents. Increasing efficiency & allowing more output to be produced at a lower average cost
→ seen on the falling portion of the LRAC curve.
b)
Specialisation of management
Allows for specialization of departments such as production, sales, finance and so on
Increasing efficiency and lower average cost → seen on the falling portion of the LRAC curve as output increases.
c) bulk buying of inputs
- as output increases, firms can gain discounts off large orders of input
- decrease COP -> average cost falls -> seen on the falling portion of the LRAC curve
d) financing economies
- large firms are often perceived to be of lower risk than smaller firms when it comes to banks lending them money for the expansion of projects
- a lower rush can often mean a lower rate of interest on money borrowed which lowers costs
- decreased COP -> average costs falls -> seen on the falling portion of the LRAC curve

Question 13

diseconomies of scale (DOS)

Answer 13

DOS is defined as increases in the average costs of production in the LR as a firm increases its output by increasing all its input.
DOS is seen as movement upward along the LRAC curve as output increases

Question 14

long run

Answer 14

(LR) period of time when all factors of production can be changed or varied

Question 15

deriving LRAC from SRAC curves

Answer 15

Assuming that there’s only 3 plant sizes available for a firm to expand its output in the LR as shown the diagram below.
• For any output at Q1, the firm will use Plant Size 1 facing lowest cost at (b).
• For any output at Q2, firm continuing to use Plant Size 1 will face higher cost at (a) in the SR as firm cannot alter plant size (fixed variable).
• In the next period (LR), firm will use Plant Size 2 → lowering its cost to (b).

Question 16

when perfect substitutes, ped=

Answer 16

infinity(horizontal)

perfect substitutes, when one price increases, consumers will swap to another