Revenue and Profit and Market Structures (Long run and Short run)

Question 1

total revenue

Answer 1

TR
defined as the money collected from the sale of goods and services.

TR= PRICE * QUANTITY

Question 2

Average Revenue

Answer 2

AR
the price at which the firm sells each unit of its output

AR= TR/Quantity

Question 3

Marginal Revenue

Answer 3

MR
the change in total revenue from selling an additional/one more unit of output.

MR= change in TR/change in quantity

Question 4

Normal profit

Answer 4

It is the minimum amount of profit needed to encourage a firm to continue production or stay in business in the long run.

when AR=AC
TC=TR

NORMAL PROFIT IS ADDED TO WAGES, RENT AND INTEREST TO GET TC SO WHEN TC = TR NORMAL PROFIT OCCURS

Question 5

Abnormal profit or supernormal profit

Answer 5

refers to any profit earned in excess of normal profit

when AR > AC

AKA surplus profit and economic profit

Question 6

subnormal profit

Answer 6

refers to when average costs exceed average revenue, aka a loss

Question 7

Profit maximisation

Answer 7

when a firm takes advantage of any opportunity to earn additional profit.

Producers objectives are to maximise profits.

Question 8

marginal profit

Answer 8

MR-MC

Question 9

MR > MC

Answer 9

can produce and should sell more units of output

Question 10

MC > MR

Answer 10

output of firm should be decreased

Question 11

MC = MR

Answer 11

Profit maximisation

Question 12

Other objectives: survival and sales maximisation

Answer 12

• a firm may set prices low to keep consumers from switching to other products as a result the firm will stay in business but it’s might be low.
• some firms may cut prices to encourage consumers to purchase their products, resulting in lower profits although increased market shares

Question 13

In the short run,

Answer 13

the numer of firms in the market is fixed, no new firms can enter and exisiting ones cannot leave

Question 14

Let’s assume perfect competition exists in the market for sweet peppers

Answer 14

since firms in perfect competition are price takers, the market price is 5 dollars and all firms sell their product at this price. Any firm that doesn’t sell at market price will not sell peppers, as consumers will just buy from the other firms in the market.

Question 15

Under perfection competition in the short run where there is abnormal or supernormal profit

Answer 15

more firms will enter the market, HOWEVER THIS CAN ONLY OCCUR IN THE LONG RUN. As more firms enter the industry, supply increases causing market price to decrease

Question 15

IF in short run, the firm is earning normal profit being that AR=AC then

Answer 15

no firms would be inclined to leave and no new firms would want to enter the market as no firm would like to suffer a loss. This represents equilibrium

Question 15

SHORT RUN EQUILIBRIUM UNDER PERFECT COMPETITION SHOWING…

P=AR=MR=D

Answer 15

horizontal line from the price axis, demand for the good is equal to the market price, average revenue equals price and marginal revenue becuase the firm makes normal profit and average revenue is constant

Question 15

If in the short run, a loss is incurred being AR is less than AC then

Answer 15

firms are inclined to leave the industry HOWEVER THIS CAN ONLY OCCUR IN THE LONG RUN. As firms leave the market, supply decreases and market price increases.

Question 16

product optimum

Answer 16

Qo OR Qo

MC=AC

Question 17

SHORT RUN EQUILIBRIUM

Answer 17

MC = MR

Question 18

Marginal cost curve

Answer 18

Essentially, the supply curve of the firm that operates under perfect competition.

(makes normal profit wiling to price goods at market price as it covers all cost of production hence noraml profit and perfect comp)

Question 19

perfect competiton does not

Answer 19

exist. In reality, it just theory brought up by economists

Question 20

UNDER Monopoly, Oligopoly, Monopolistic competition

Answer 20

two curves AR (demand curve)
MR downard slopping

Question 21

QE for monopolies, oligopolies and monopolistic competition

Answer 21

MR=MC=E=D=P

Question 22

abnormal/supernormal profit
subnormal/loss
normal

Answer 22

ar is higher than ac
ac is higher than ar
ac same area as ar

Question 23

why are monopolies and oligopolies criticised

Answer 23

because the quantity oligopolies and monopolies produce don’t correspond to the productive optimum. Oftentimes, they produce less than the productive optimum (max output) at the same price

Question 24

monopolies always earn

Answer 24

supernormal profit so they hav EVERYTHING TWO PRICES FOR SHORT RUN/LONG RUN EQUILIBRIUM

Question 25

MONOPOLISTICALLY COMPETITIVE FIRM

Answer 25

EARN ALL PROFITS HOWEVER IN NORMAL THEY HAVE PRODUCT OPTIMUM LIKE A MONOPOLY

Question 26

MONOPOLIES DO NOT

Answer 26

PRODUCE AT PRODUCT OPTIMUM, there is not an efficient allocation of resources

Question 27

kinked demand curve

Answer 27

collusive- they meet to determine prices cartel
non-collusive-obvi they do not

oligopolies- cane be kinked, MR is kinked and two MC curves are drawn through the MR

sticky prices are caused from this, meaning, price does not change/stays the same collusion occurs