Revenues, Costs and Profits

• Revenue is the money earned from the sale of goods and services
• What does total revenue (TR) measure?

  Money coming into the business
• Average revenue (AR) is equal to demand when calculated as total revenue divided by output
• How is marginal revenue (MR) calculated?

  Change in total revenue / change in output
• Firms in perfect competition have a perfectly elastic demand curve because they have no price-setting power
• In a perfectly elastic demand curve, MR is equal to AR and the price received by the firm is constant
• Why is the TR curve upward sloping for a perfectly elastic demand curve?

  Price is constant
• For most goods, the price decreases as output increases, resulting in a downward sloping demand curve
• The demand curve for a firm is the same as its average revenue curve
• What type of competition allows firms to have price-setting power?

  Imperfect competition
• The concept of price elasticity is directly linked to marginal revenue
• If marginal revenue is negative, the demand curve is inelastic
• What happens to total revenue when marginal revenue equals zero?

  It is maximised
• Steps of the relationship between marginal revenue and total revenue for a typical demand curve

  1️⃣ MR is positive, TR increases

  2️⃣ MR is zero, TR is maximised

  3️⃣ MR is negative, TR decreases
• The economic cost of production is the opportunity cost of production
• In the short run, at least one factor of production is fixed
• What does total cost (TC) include?

  Fixed and variable costs
• Marginal cost (MC) is the extra cost of producing one more unit
• What is the law of diminishing returns called when applied to marginal productivity?

  Diminishing marginal productivity
• The marginal cost of production rises as marginal output decreases
• Why does the average fixed cost (AFC) curve start high and fall as output increases?

  Fixed costs are divided by larger output
• The average total cost (ATC) curve is U-shaped due to the law of diminishing marginal productivity
• The marginal cost (MC) curve is U-shaped due to the law of diminishing marginal productivity
• At what point does the marginal cost (MC) curve intersect the average total cost (AC) curve?

  Lowest point on the AC curve
• Average costs can be calculated from the total cost curve by dividing total cost by output
• Short-run average cost (SRAC) curves are U-shaped because of the law of diminishing returns
• Why is the long-run average cost (LRAC) curve U-shaped?

  Economies and diseconomies of scale
• Match the curve type with its characteristic:

  LRAC ↔️ ‘Envelope’ for SRAC curves

  SRAC ↔️ U-shaped due to diminishing returns
• What are economies of scale?

  Advantages of large-scale production
• Increasing returns to scale occur when a percentage increase in inputs leads to a greater percentage increase in output
• Diseconomies of scale reduce efficiency and cause average costs to rise
• What happens to output when a firm experiences decreasing returns to scale?

  Output increases by a smaller percentage than inputs
• The minimum efficient scale is the output level where the LRAC curve first levels off and constant returns to scale are first met
• What is an internal economy of scale?

  An advantage from a firm’s own growth
• Technical economies arise from improvements in the production process
• Specialisation is a type of technical economy that allows large firms to appoint specialists
• Firms experience decreasing returns to scale
• Constant returns to scale occur when firms increase inputs and receive the same proportional increase in output.
• What does the minimum efficient scale refer to?

  Economies of scale exploitation
• Internal economies of scale arise from growth within the firm