3.3 Revenue, costs and profit Flashcards
(15 cards)
What is the relationship between the AR curve and the demand curve in perfectly competitive markets?
AR = the demand curve, as AR is the price of the good, and the demand curve shows the relationship between price and quantity.
What happens to quantity demanded if demand is elastic and price increases?
Quantity demanded will fall by a lot
What are fixed costs?
Costs that do not vary with output, such as rents and advertising.
What are variable costs?
Costs that change with output, such as raw materials.
What does marginal cost measure?
The cost to produce one extra unit of output, calculated by ∆TC÷∆Q.
What is the law of diminishing marginal productivity?
Adding more units of a variable input to a fixed input increases output at first, but eventually leads to a fall in marginal output.
What is it called when average costs are at their lowest on the LRAC curve?
This is the minimum efficient scale.
What happens to average costs when a firm experiences economies of scale?
Average costs fall as output increases.
What are the internal economies of scale?
Economies that occur within a firm as it grows larger, lowering average costs.
What are external economies of scale?
Economies that occur within an industry as it grows larger.
What are diseconomies of scale?
When average costs start to increase as output passes a certain point.
What is normal profit?
The minimum reward required to keep entrepreneurs supplying their enterprise in the long run.
What is supernormal profit?
Profit above normal profit, exceeding the opportunity cost of investing funds.
What is the shut-down point for a firm?
When price is less than average variable cost (P < AVC).
What happens to average costs in the long run after reaching the optimum level of output?
Average costs begin to rise due to diseconomies of scale.
