Chapter 7.2 Flashcards
Revenue
The payment firms receive when they sell the goods and services they produce
Marginal revenue
The additional revenue arising from the sale of an additional unit of output
Costs of production
Money payments to buy resources plus anything else given up by a firm for the use of resources
What is economic cost made up of?
The sum of explicit and implicit costs incurred by a firm for its use of resources
Economies of scale
Decreases in average costs of production over the long run as a firm increases all its factors of production
Reasons for economies of scale
Specialization of labor
Specialization of management
Bulk buying of inputs
Financing economies
Spreading of certain costs over large volumes of output
Reasons for diseconomies of scale
Co-ordination and monitoring difficulties
Communication difficulties
Poor worker motivation
Profit maximization
Determining the level of output that the firm should produce to make profit as large as possible
Loss
When total revenue is not sufficient to cover all costs
Abnormal profit in terms of revenue
When total revenue is greater than total cost, so the firm has positive profit
Normal profit in terms of revenue
When total revenue is equal to total cost, so the firm has zero profit
Loss in terms of revenue
When total revenue is less than total cost, so the firm has negative profit
When do firms maximize profits or minimize losses in terms of MR and MC?
When MR = MC at the quantity of output
Normal profit definition in terms of revenue
The minimum amount of revenue that the firm must receive so that it will keep the business running
Normal profit definition in terms of costs
The amount of revenue that covers all explicit and implicit costs
