Revenues, Costs, Profits, Efficiencies and Objectives Flashcards
(29 cards)
Total revenue
price x quantity
Average revenue
total revenue ÷ quantity
Marginal revenue
change in total revenue ÷ change in quantity
Characteristics of perfect competition
very many consumers, similarly sized firms, identical product (homogenous),
perfect information (e.g about price)
Price taker
a firm in a competitive market that has to accept the market price
Price maker
a firm that has control over the market price
Fixed costs
costs that do not vary with the level of output (short run) e.g salaries, rent
Variable costs
costs that vary with the level of output e.g raw materials, wages
Total cost
fixed costs + variable costs
Average total cost
total cost ÷ quantity
Marginal cost
change in total cost ÷ change in quantity
Law of diminishing returns
if a firm increases it’s input of one factor of production while other factors are fixed, it will eventually lead to less extra product of the variable factor
Short run
the period when a firm can only vary the input of one of its factors of production e.g labour, but faces a fixed input of the others
Long run
the period when a firm can vary the inputs of all its factors of production
Economies of scale
where an increase in size of a firm’s level of output leads to lower long run average cost
Types of Economies of Scale
Purchasing, Managerial and Marketing, Risk bearing, Financial, Technical and Transport
Minimum efficient scale
the level of output where LRAC sotps falling as output increases
Diseconomies of scale
when an increase in the level of output leads to higher lrac
Productive efficiency
ac = mc where production takes place using the least amount of scarce resources, producing at minimum ac
Allocative efficiency
p = mc. when society is producing an appropriate bundle of goods relative to consumer preferences
Dyanamic efficiency
an increase in ae or pe in the long run due to an increase in innovation or technical progress
x inefficiency
when a firm lacks the incentive to keep costs down so is not working of minimum lras
Profit maximisation
mc = mr
Normal profit
profit that covers the opportunity cost of capitol and is just sufficient to keep the firm in the market
