Theme 3.3 Flashcards
(25 cards)
What is total revenue?
Total revenue is calculated by price x quantity sold.
What is marginal revenue?
Marginal revenue is the extra revenue a firm earns from the sale of one extra unit.
When is total revenue maximized?
Total revenue is maximized when marginal revenue is 0.
How is average revenue calculated?
Average revenue (AR) is calculated by TR / quantity sold.
What does the average revenue curve represent?
The average revenue curve is the firm’s demand curve.
What is the shape of the AR curve in perfectly competitive markets?
In markets where firms are price takers, the AR curve is horizontal.
What happens to the quantity demanded if demand is elastic and price increases?
The quantity demanded will fall.
What is total cost?
Total cost is how much it costs to produce a given level of output.
What are total variable costs?
Total variable costs change with output and are direct costs.
What are total fixed costs?
Total fixed costs do not vary with output and are indirect costs.
How is average total cost (ATC) calculated?
Average total cost (ATC) = total costs / quantity produced.
What is marginal cost?
Marginal cost is how much it costs to produce one extra unit of output.
What does the law of diminishing marginal productivity state?
It states that adding more units of a variable input to a fixed input increases output at first, but eventually leads to a fall in marginal output.
What happens to average variable cost (AVC) as output increases?
The average variable cost curve tends towards the average total cost curve.
What is the minimum efficient scale?
The point of lowest long-run average cost (LRAC) where costs are lowest.
What are internal economies of scale?
These occur when a firm becomes larger, leading to a fall in average costs as output increases.
Give an example of risk-bearing economies of scale.
When a firm can spread the cost of uncertainty across its production range.
What are diseconomies of scale?
These occur when output passes a certain point, causing average costs to increase.
What is the shut-down point for a firm?
The shut-down point is when price (P) is less than average variable cost (AVC).
What is normal profit?
Normal profit is the minimum reward required to keep entrepreneurs supplying their enterprise.
What is supernormal profit?
Supernormal profit is the profit above normal profit, exceeding opportunity cost.
What is the condition for profit maximization?
Profit maximization occurs when marginal cost (MC) equals marginal revenue (MR).
What happens when a firm shuts down in the short run?
No variable costs are incurred, but fixed costs must still be paid.
Fill in the blank: Average revenue equals _______.
marginal revenue
