3.3 Revenues, Costs and Profits Flashcards
(13 cards)
What is the formula for total revenue?
Total revenue = price x quantity sold
Total revenue is the revenue received from the sale of a given level of output.
What does marginal revenue represent?
Marginal revenue is the extra revenue a firm earns from the sale of one extra unit.
When marginal revenue is 0, total revenue is maximized.
How is average revenue calculated?
Average revenue (AR) = Total revenue / quantity sold
AR is also the price each unit is sold for.
What is the relationship between average revenue and the demand curve?
The AR curve is the firm’s demand curve.
This is because the average revenue curve represents the price of the good.
In what type of market is the AR curve horizontal?
In markets where firms are price takers.
This shows the perfectly elastic demand for their goods.
What happens to total revenue if demand is elastic and price increases?
Total revenue decreases.
This is because quantity demanded will fall significantly.
What is the relationship between marginal cost and average cost when total variable costs increase?
Both marginal cost curve and average cost curve shift upwards.
Only the average cost curve shifts upwards when total fixed costs increase.
What does the law of diminishing marginal productivity state?
Adding more units of a variable input to a fixed input increases output at first, but eventually leads to a fall in marginal output.
This occurs after a certain number of inputs are added.
What are the components of total cost?
Total cost = total variable costs + total fixed costs
Total costs indicate how much it costs to produce a given level of output.
What is the minimum efficient scale?
The point of lowest long run average cost (LRAC).
This is where the optimum level of output is since costs are lowest.
What are internal economies of scale?
Economies of scale that occur when a firm becomes larger, leading to lower average costs as output increases.
Examples include risk-bearing, financial, managerial, technological, marketing, and purchasing economies.
What is normal profit?
Normal profit is the minimum reward required to keep entrepreneurs in business, covering opportunity costs.
This occurs when total revenue equals total costs (TR = TC).
What happens at the shut-down point?
The firm shuts down when price is less than average variable cost (AR < AVC).
This indicates that variable costs cannot be covered.
