Topic 3: Revenues, Costs and Profits Flashcards
How do you calculate total revenue?
Price x quantity sold
Define marginal revenue
when occurs when it = 0
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
TC - TVC
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 returns
states that when a variable factor of production is added to a sotck of fixed factors of production total/marginal product will initially rise then fall
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.