Rev, Costs and Profits

• How is total revenue calculated?

  Total revenue = price x quantity sold
• What does total revenue represent?

  Revenue from the sale of a given output
• What happens to total revenue when price is constant?

  Total revenue is shown in the diagram
• What is average revenue (AR)?

  Average revenue is TR / quantity sold
• Why is the AR curve the firm’s demand curve?

  Because AR represents the price of the good
• What does a horizontal AR curve indicate in price-taking markets?

  It shows perfectly elastic demand for goods
• What is marginal revenue (MR)?

  Extra revenue from selling one additional unit
• When is total revenue maximized in relation to marginal revenue?

  When marginal revenue is 0
• Where is the point where MR = 0 located on the revenue diagram?

  Directly below the midpoint of the AR curve
• What happens to total revenue if prices rise or fall around the MR = 0 point?

  Total revenue would fall
• How does the AR curve relate to the demand curve in price-taking markets?

  AR equals the demand curve in these markets
• What happens to quantity demanded if demand is elastic and price increases?

  Quantity demanded will fall
• If price rises by 10% and demand decreases by 20%, what is the elasticity of demand?

  +2, indicating very elastic demand
• What does it mean if the price elasticity of demand is +0.1?

  Demand is relatively inelastic, revenue increases
• Why is the AR curve usually downward sloping?

  Price per unit is reduced as units are sold
• How does the steepness of the MR curve compare to the AR curve?

  The MR curve is twice as steep as the AR curve
• What is the nature of the AR curve?

  The AR curve is a trend line
• What is the formula for total cost?

  Total costs = total variable costs + total fixed costs
• How do total costs change with output?

  An increase in output raises total costs

  
• What are fixed costs?

  Costs that do not vary with output
• What are variable costs?

  Costs that change with output levels
• What happens to variable costs in the long run?

  All costs become variable in the long run
• What is the formula for average total costs (ATC)?

  ATC = total costs / quantity produced
• How is average fixed cost (AFC) calculated?

  AFC = total fixed costs / quantity produced
• What is the formula for average variable costs (AVC)?

  AVC = total variable costs / quantity produced
• What is the definition of profit?

  Profit is total revenue minus total cost.
• What is the reward for entrepreneurs taking risks?

  Profit is the reward for entrepreneurs.
• What does marginal cost represent?

  Cost to produce one extra unit of output
• When does profit maximisation occur?

  When marginal cost equals marginal revenue.
• What does it mean when each extra unit produced gives no extra loss or revenue?

  It means MC equals MR.
• What is normal profit?

  Minimum reward to keep entrepreneurs operating.
• How is marginal cost calculated?

  Marginal cost = ∆TC ÷ ∆Q
• What does normal profit cover?

  It covers the opportunity cost of investment.
• When does normal profit occur in terms of revenue and costs?

  When total revenue equals total costs.
• How is normal profit treated in production costs?

  It is included as a cost of production.
• What does the short run imply in production?

  At least one factor of production is fixed
• What is supernormal profit?

  Profit above normal profit.
• What does supernormal profit exceed?

  It exceeds the opportunity cost of investment.
• When does a firm incur losses?

  When total costs exceed total revenue.
• How does the short run differ across industries?

  The short run varies significantly by industry