Micro 7 - Revenue, Profit and Efficiency Flashcards
Total Revenue - definition
> The total amount of money received, in a time period, from a firm’s sales.
Also known as ‘turnover’.
TR = Q (total quantity) x P (price).
Average revenue - definition
> Revenue per unit sold.
>AR = TR/ Q.
Marginal revenue - definition
> The amount one more unit sold will decrease or increase revenue by.
MR = TRn - TRn-1.
Demand curve and AR
> The demand curve is also the AR curve as price is equal to the average revenue.
When the demand curve is perfectly elastic, the marginal revenue = average revenue as each unit sold brings in the same revenue as all the others.
Total revenue - info
> TR is at its’ max when MR = 0.
The max TR occurs at the midpoint of the AR curve.
MR is twice as steep as AR.
MR = 0 when TR = max as additional sales reduce TR as MR becomes negative.
Price taker
> A firm that has no power to control the price it sells at - it has to accept the market price.
A price taker’s demand curve will be flat (i.e. perfectly elastic).
Price maker
> A firm that has some power to control the price it sells at.
Downward sloping demand curve (i.e. to increase sales, the firm must reduce price).
PED and the demand curve.
> At the midpoint of the demand curve, PED = -1 so TR is maximised.
To the left of the midpoint, demand is elastic so decreasing a product’s price towards the midpoint will cause a more proportionate increase in sales, and so TR will increase.
To the right of the midpoint, demand is inelastic so decreasing a products price below the midpoint will cause a less than proportionate increase in sales and TR will decrease.
Profit - definition
> The difference between total revenue and total costs.
>Profit = TR - TC.
Normal profit - definition
> A firm is making normal profit when its total revenue is equal to total costs.
TR = TC.
Supernormal profit - definition
> A firm is making supernormal profit when its total revenue exceeds total costs.
Normal profit - info
> Normal profit occurs when the extra revenue left,on top of what’s needed to cover the firm’s cost, is equal to the OC of the FoPs that aren’t paid for.
Therefore, normal profit is the minimum level of profit needed to keep resources in their current use in the long run otherwise, the FoPs would be better as a different use.
Supernormal profit - definition
> Supernormal profit occurs when TR > TC.
This means the revenue generated from using the FoPs in this way is greater than could have been generated by using them in any other way.
Supernormal profit creates an incentive for other firms to enter that industry.
Profit-maximisation
> The profit-maximising output level occurs when MC = MR.
A.k.a the ‘MC = MR profit-maximising rule’.
If MR>MC, the firm should increase output as revenue gained by increasing the output is greater than the cost of producing it. So increasing output adds to profit.
If MR
What is traditional theory based upon?
> Traditional theory is based upon the assumption that firms want to maximise profit.
