Revenues, costs and profits

• What is total revenue?

  The amount of money a firm receives
• What is the formula for total revenue?

  Price x quantity sold
• What is a price maker firm?

  A firm that has enough market power to influence the price of the good it is selling
• What shape is the total revenue curve for a price maker firm?

  It is a parabola shape, where as the price decreases the revenue will increase up to the point of maximum revenue, where further price cuts will cause total revenue to decrease
• What is a price taker firm?

  A firm that has to offer its product at the same price as other competitors
• What shape is the total revenue curve for a price taker firm?

  It is a straight line through the origin, where the firm is operating in a competetive market and so has to accept the market determined price, whatever output it produces
• What is average revenue?

  The revenue the firm receivs per unit sold
• What is the formula for average revenue?

  Total revenue/quantity sold
• What shape is the average revenue curve for a price maker firm?

  Downward sloping
• What shape is the average revenue curve for a price taker firm?

  Horizontal, because revenue depends entirely on demand and supply, and these firms have to accept the price offered
• What is marginal revenue?

  The addition to total revenue from selling one more unit of output
• What is the formula for marginal revenue?

  Change in total revenue/change in quantity sold
• What shape is the marginal revenue curve for a price maker firm?

  Downward sloping, with the gradient being two times steeper then the average revenue curve, but is overall less than average revenue because cutting prices means losing money on the items that the firm sold
• What shape is the marginal revenue curve for a price taker firm?

  Horizontal and equal to average revenue
• What is the relationship with revenue when demand is price elastic?

  Marginal revenue is positive, and total revenue moves in the opposite direction to the price change
• What is the relationship with revenue when demand is price inelastic?

  Marginal revenue is negative, and total revenue moves in the same direction as the price change
• What is the relationship with revenue when demand is unitary elastic?

  Marginal revenue is 0, and total revenue is the same as the previous price change
• What are costs?

  The payments that firms make for the use of factors of production, such as rent and wages
• What is normal profit?

  A reward for risk taking included in costs, which represents the amount the risk taker must receive to keep resources in their current use
• What is total cost?

  The cost of producing a given level of output
• What are total fixed costs?

  Costs which don't change directly with ouput, such as the rent paid for a factory building
• What are total variable costs?

  Costs which vary directly with output, such as the wages needed to pay workers
• What is average cost?

  The cost per unit of output
• What is the formula for average cost?

  Total cost/quantity of output
• What happens to average costs for a firm?

  They initially decrease as more is produced because the fixed cost is spread out over more units of output
• What are average fixed costs?

  The fixed costs per unit per unit of ouput, and which are spread out as more is produced, meaning that fixed cost per unit decreases as output increases
• What is the formula for average fixed cost?

  Total fixed cost/quantity of output
• What are variable fixed costs?

  The variable costs per unit of output
• What is the formula for variable fixed costs?

  Total variable cost/quantity of output
• What is marginal cost?

  The cost to the firm of producing one more unit of output
• What is the formula for marginal cost?

  Change in total cost/change in quantity of output
• What happens to production when marginal cost is below average cost?

  Production will increase because the cost of producing the next unit is less than the average cost of producing a unit, though the average cost will not decrease more than the marginal cost
• What happens to production when marginal cost is above average cost?

  Production will decrease because the cost of producing the next unit is more than the average cost of producing a unit
• What is the law of diminishing returns?

  As more variable factors are added to fixed factors of production, the increase in output will eventaully decrease
• When is the law of diminishbing returns applicable?

  In the short run, because this is when at least one factor of production is fixed
• In the example of an apple farmer, what would be the fixed and variable factors?

  The fixed factor would be the orchard and the variable factor would be the workers
• What is total product?

  The total output of a firm in a given period of time
• What is average product?

  The unit of output produced per unit of a variable factor of production
• What is the formula for average product?

  Total product/quantity
• What is marginal product?

  The change in output resulting from employing one more unit of the variable factor