lesson 4 - theory of the firm: revenues

Question 1

what’s the equation for revenue?

Answer 1

price times quantity

P X Q

Question 2

what’s the equation for profit?

Answer 2

total revenue - total costs

Question 3

what is the L-shaped LRAC curve associated with?

Answer 3

large scale manufacturing

Question 4

when do we have falling total returns?

Answer 4

when marginal returns turn negative

Question 5

what is total returns?

Answer 5

the total amount of output a set of inputs produced

Question 6

what is revenues?

Answer 6

amount a firm earns by selling goods and services in a given time period

Question 7

what is costs?

Answer 7

the expenses that collected in the period of producing goods and services

Question 8

what are the four factors of production?

Answer 8

land
labour
capital
enterprise

Question 9

what is the production function?

Answer 9

the maximum output that can be produced given the inputs

Question 10

how do you figure out total revenues?

Answer 10

average revenues times sales

AR X Sales

Question 11

how do you figure out average revenues?

Answer 11

total revenues divided by sales

sales

Question 12

what does price equal?

Answer 12

price = AR (average revenue)

Question 13

what should producers do if they have a sensitive PED?

Answer 13

it means their demand is elastic

there are substitutes

so do not raise prices

or loss of revenue

Question 14

when do we have high season?

Answer 14

when demand is inelastic (lack of choice)

busy

high prices

= producer sovereignty

Question 15

when do we have low season?

Answer 15

when demand is elastic (choices)

not busy

low prices

= consumer sovereignty

Question 16

what is consumer sovereignty?

Answer 16

when consumers have the power as there’s choice

Question 17

what is producer sovereignty?

Answer 17

when producers have power due to lack of choice

Question 18

when demand is inelastic what do firms do?

Answer 18

they raise prices to maximise revenues

Question 19

what do firms do when demand is elastic?

Answer 19

cut prices to boost demand, clear stock and raise total revenue

Question 20

what does differentiating a product do?

Answer 20

promotions which establish brand loyalty to make demand for their product more inelastic

Question 21

what is marginal revenue?

Answer 21

the addition to the total revenue from the sale of one more unit

Question 22

how do you figure out marginal revenue?

Answer 22

change in total revenue divided by change in output

change in
output

Question 23

what are the four market structures?

Answer 23

perfect competition

monopolistic competition

oligopoly

monopoly

Question 24

what is the theoretical market structure?

Answer 24

perfect competition

Question 25

what are market structures formed by?

Answer 25

barriers to entry

Question 26

how many firms are in all four market structures?

Answer 26

perfect competition: many monopolistic competition: many oligopoly: 2-4 dominate monopoly: 1

Question 27

what is the variety of goods like in all four market structures?

Answer 27

perfect competition: none monopolistic competition: some oligopoly: some monopoly: none

Question 28

how much control over prices does all four market structures have?

Answer 28

perfect competition: none monopolistic competition: low oligopoly: high monopoly: all/complete

Question 28

what's the barriers to entry and exit like in all four market structures?

Answer 28

perfect competition: none monopolistic competition: low oligopoly: high monopoly: complete

Question 29

what should we do when we have excess demand?

Answer 29

bid up prices

Question 30

what should we do when we have excess supply?

Answer 30

cut prices to clear stock

Question 31

what are the assumptions of perfect competition?

Answer 31

homogenous output (all the same with no variety) many firms consumers and producers cannot affect the price as its set by the market mechanism no asymmetric information so perfect consumer and producer knowledge freedom of entry and exit consumers can buy as much as they wants and producers can sell as much as they want

Question 32

what is the market mechanism?

Answer 32

demand and supply

Question 33

what are the features of AR and MR in perfect competition?

Answer 33

perfectly elastic demand we can sell any quantity of a good or service but cannot influence price because everything is selling at the same price that means the additional unit (marginal revenue) will be the same as the AR

Question 34

how does the AR and MR curves work in a monopoly?

Answer 34

the marginal revenue curve must lie between the AR/demand curve if we cut prices to sell more/clear stock the MR curve must also slope downwards at a steeper angle because the additional units will be sold at an even lower price

Question 35

when do we have revenue maximisation?

Answer 35

MR=0