Topic 3.3: Revenues, Costs and Profits Flashcards
(20 cards)
Marginal revenue
The extra revenue a firm earns from the sale of one extra unit. When marginal revenue us 0, total revenue is maximised.
On cost and revenue diagram how much steeper is MR than AR?
2x as steep
Average revenue
The average receipt per unit/price each unit is sold for.
What does the AR curve look like in markets when firms are price takers?
The AR curve is horizontal as this shows the perfectly elastic demand for their goods. As the demand curve shows the relationship between price and quantity. Average revenue = marginal revenue.
What does the AR curve look like in markets when firms are price makers?
The AR curve us downward sloping.
Marginal costs
How much it costs to produce one extra unit.
In 3 bullet points, what is the law of diminishing marginal productivity
- Adding more units of a variable input to a fixed input, increases output at first.
- However, after a certain number of inputs are added, the marginal increase of output becomes constant.
- Then, when there is an even greater input, the marginal increase in output starts to fall.
Draw a diagram to show how economies and diseconomies of scale works.
- The lowest point is the minimum efficient scale. This is where the optimum level of output is since costs are lowest.
Show the relationship between SRAC curve and the LRAC curve on a diagram
The LRAC curve envelopes the SRAC curve, and it is always equal to or below the SRAC curve. The LRAC curve shifts when there are external economies of scale, i.e. when an industry grows.
What are the 6 different types of internal economies of scale?
(really fun mums try making pie)
- Risk-bearing
- Financial
- Managerial
- Technological
- Marketing
- Purchasing
External economies of scale
These occur within an industry when it gets larger. Eg local roads might be improved, so transport costs for the local industries will also fall. Also there might be more training facilities or more research and development, which will also lower average costs for firms in the local area.
What are the 3 types of diseconomies of scale?
Control- becomes harder to monitor how productive the workforce is, as the firm becomes larger.
Coordination- It is harder and complicated to coordinate every worker, when there are thousands of employees.
Communication- Workers may start to feel alienated and excluded as the firm grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation.
Normal profit
The minimum profit required to keep entrepreneurs supplying their enterprise in the long run. It covers the opportunity cost of investing funds in the the firm and not elsewhere.
Supernormal profits
The profit above normal profits. This exceeds the value of opportunity cost of investing funds into the firm. When TR > TC
Losses
A firm makes a loss when they fail to cover their total costs.
When might a firm choose to continue operating at a loss in the short run?
P > AVC
What is the short run shut down price?
When variable costs cannot be covered. This is at the lowest point of the AVC curve. P < AVC.
What is the long run shut down price?
TR < TC
Draw a diagram to illustrate a firm making a loss in the short run and the effects of this
- This diagram shows how the revenue curves lie below the cost curves.
- Therefore, P < C. The rectangle formed shows the area of loss.
- At a price of P and an output of Q, the firm would shut down in the short run.
Why does economies of scale occur?
TC rises but Q rises faster
