Profit Maximisation - Lecture 12 Flashcards
(14 cards)
price taker seller meaning
a seller is a price taker if it can sell as much as it wants at a given price
price takers are small compared to the size of the market
PED equation
PED= %ΔQD/%ΔP
price taker buyer meaning
if the individual can buy as much as they want at a given price without affecting the price
Normal profit meaning
TR=TC
firm breaks even
Supernormal profit meaning
TR>TC
total revenue is greater then total cost
Average revenue meaning and equation
the amount that the firm earns per unit of output sold
AR=TR/Q
Marginal revenue meaning and equation
the extra revenue of selling one more unit of output
MR=ΔTR/ΔQ=TR(Q+1)-TR(Q)
how does the average and marginal revenue curve look like when the firm is a price taker
it is horizontal and P=AR=MR
as they can sell any amount of good but its at a constant price
shut down meaning
if the firm should be producing anything or not
short run shut down explained
a firm should shut down in the short time when the AVC is higher than the Price
since some factors are fixed the firm must pay its fixed cost whether it shuts down or not
if TR covers the TVC then it is able to pay off some of its TFC
as the TFC stays constant
in the short run the firm cannot leave the market so it should just unemploy the variable costs
long run shut down point explanation
long run there are no fixed cost and costs are all variable
so there is no AFC
so if AVC is higher than the Price then the firm should shut down and leave the market
unit profit meaning
difference between revenue and ATC
what should a firm do if it doesn’t shut down and why
it should produce where
MR=MC
MR=ΔTR/ΔQ
MC=ΔTC/ΔQ
MR=ΔTR/ΔQ > ΔTC/ΔQ=MC
as both would change by the same quantity the ΔQ cancels out
MR=ΔTR > ΔTC=MC
so the change in total revenue will be larger than the change in total cost
this means that there will be supernormal profits
