3.3- Revenues, costs and profits Flashcards
(39 cards)
What is revenue?
The money earned from the sale of goods and services.
How do you calculate total revenue?
Quantity x price
How do you calculate average revnue?
AR= demand
total revenue/ output
What is marginal revenue?
The extra revenue that the firm earns from selling one more unit of production.
change in total revenue/ change in output
OR:
total revenue from N goods- total revenue from (N-1) goods
Why do some firms experience a perfectly elastic demand curve?
- perfect competition.
- no price setting power.
- the price received by the firm for the good is constant so MR=AR=D. (horizontal)
- The TR curve is upward sloping because prices are constant and so more goods sold, higher revenue made.
Why do most firms have a downward sloping demand curve?
- price decreases as output increases and therefore downward AR curve.
- Firms with a downward sloping demand curve are firms that are in imperfect competition and have price setting power.
- AR curve indicates the price that consumers are willing to pay for each quantity sold.
How is the elasticity of the demand curve linked with marginal revenue?
- If MR is positive, when the firm sells the product at a lower price, total revenue still grows and so the demand curve is elastic.
- If MR is negative, TR decreases as price decreases and so demand curve is inelastic.
-When MR=0 , TR is maximised and the demand curve is unitary elastic. - TR curve is a U shape, rises with output( when MR is positive) but then declines (when MR is negative.
What is the economic cost of production?
- the opportunity cost.
Why are some costs fixed and some variable?
- short run at least one factor of production is fixed, therefore some costs are fixed.
- In the long run, all costs are variable
How do you work out total cost?
fixed + variable costs
What is a total fixed cost?
Costs that do not change with output and remain constant.
Example= rent, machinery
What is a total variable cost?
costs that change directly with output.
Example= materials.
How do you work out average total cost?
total costs/ output
How do you work out average fixed cost?
total fixed cost/ output
How do you work out average variable cost?
total variable cost/ output
How do you work out marginal cost?
- The extra cost of producing one extra unit.
change in total cost/ change in output.
What is diminishing marginal productivity/ law of diminishing returns?
- More workers can be added relatively easily and this will see an increase in production as machinery is used more efficiently.
- However, adding more labour will mean they have less and less impact on the amount produced as they get in the way and have no machines left to use.
- If a variable factor is increased when another factor is fixed, there will come to a point when each extra unit of the variable factor will produce less extra output than the previous.
How is a cost curve diagram drawn?
- AFC starts high because the whole fixed costs are being divided by a small output.
- ATC is a U shape due to law of diminishing marginal productivity.
- AVC also a U shape
- MC is also a U shape due to diminishing marginal productivity.
Where does the MC curve cut the AC/ ATC curve?
- MC will cut the AC line at the lowest point on AC curve.
Why are SRAC and LRAC both U shaped?
- SRAC because of diminishing marginal returns.
- LRAC because of economies of scale.
What are economies of scale?
- the advantages of large scale production that enable a large business to produce at a lower average cost.
What are diseconomies of scale?
the disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise.
What is the minimum efficient scale?
The minimum level of output needed for a business to fully exploit economies of scale.
What is an internal economy of scale? NAME 6
An advantage that a firm is able to enjoy because of a growth in the firm.
Risk bearing
Financial
Managerial
Technical
Marketing
Purchasing
