Revenue, Cost and Profit Flashcards
Total revenue
The amount received by a firm in total over a certain period.
TR = Price x Quantity
Average Revenue
Revenue per unit.
AR = TR/Quantity ——–> AR = PxQ/Q
So therefore AR = Price.
Marginal Revenue
The revenue associated with each additional unit sold.
The change in total revenue from selling another unit.
Short/Long Run Costs
In the Short Run, at least one factor of production is fixed.
In the Long Run, All factors of production are variable.
Fixed/Variable Costs
(Total Cost)
Fixed Costs don’t change with output and are Short Run only.
Variable Costs change with output and occur in both the Short Run and Long Run.
These combine to make Total Cost.
Average Costs
Average Fixed Costs = Fixed Costs/Output
Average Variable Costs = Variable Costs/Output
Average Cost is the sum of both AFC and AVC.
Marginal Costs
The change in Total Costs when one additional unit of output is produced.
MC always goes through the minimum point of AC.
Internal Economies of Scale
The falling Long Run Average Costs associated with an increase in output.
Types of Economies of Scale:
-Financial Economies
-Marketing Economies
-Technical Economies
-Managerial Economies
-Risk Bearing Economies
External Economies of Scale
This occurs when an industry experiences expansion.
This can be caused by:
-Innovations in technology
-Infrastructure and transport links
Diseconomies of Scale
This occurs when a firm becomes too large and moves beyond its Minimum Efficient Scale.
Long run average costs will increase as output increases.
Profit Maximisation
When a firm seeks to make the greatest possible profit.
MC=MR
Marginal cost must also be rising.
Revenue Maximisation
When a firm seeks to make as much revenue as possible.
Firms will sell until the last unit adds nothing to total revenue.
MR=0
This can improve Market Share or drive out competition.
Sales Maximisation
When a firm aims to sell as many units as possible without making a loss.
AC=AR
This can improve Market Share or drive out competition.
