Theme 3 (mini-test revision)

What is total revenue (TR)?

Total funds received from selling goods

How is total revenue (TR) calculated?

P x Q

What is average revenue (AR)?

Revenue per unit sold

How is average revenue (AR) calculated?

TR/Q

What is marginal revenue (MR)?

Additional revenue from selling one extra unit

How is marginal revenue (MR) calculated?

ΔTR/ΔQ

What does a revenue curve look like in perfect competition?

Horizontal line (AR = MR = P)

What does a revenue curve look like in imperfect competition?

MR falls faster than AR due to downward-sloping demand

Where is profit maximising level of output?

MC = MR

What are fixed costs (FC)?

Do not vary with output e.g. rent

What are variable costs (VC)?

Change with output e.g. raw materials

How are total costs (TC) calculated?

FC + VC

How is average cost (AC) calculated?

TC/Q

How are average variable costs (AVC) calculated?

VC/Q

How are average fixed costs (AFC) calculated?

FC/Q

How is marginal cost (MC) calculated?

ΔTC/ΔQ

What is the MC curve like?

Tick shape which intersects AC at lowest point

Why is the AC curve U-shaped?

• Economies of scale (decreasing AC)

• Diseconomies of scale (increasing AC)

What are variables/costs in the short-run?

Fixed

What are variables/costs in the long-run?

Variable - key for expansion

What is normal profit?

Minimum profit needed to stay in business

Where does normal profit occur?

TR = TC

What are supernormal profits?

Profit made exceeding minimum required for a firm to keep its factors of production in use

Where does supernormal profit occur?

TR > TC (attracts new firms to market in long-run)

What are subnormal profits?

Costs of production higher than revenue

Where does subnormal profit occur?

TR < TC

What kind of profit is made in the long-run in perfect competition?

Normal (entry/exit of firms)

What are the assumptions of perfect competition?

• Many buyers and sellers

• Firms are price takers

• Homogenous products

• Perfect information

• No barriers to entry/exit

• Firms profit maximise

What are firms in perfect competition?

Price takers (AR = MR = P)

How is price determined in perfect competition?

Supply and demand

What type of profits can be made in the short-run?

Supernormal, normal or subnormal

What is allocative efficiency?

Resources allocated to maximise consumer welfare

When is a firm allocatively efficient?

P = MC

What is productive efficiency?

Firm produces at lowest possible average cost

When is a firm productively efficient?

Output = minimum AC

What is dynamic efficiency?

Ability of a firm to adapt and improve over time

When is a firm dynamically efficient?

AR > AC

What is X-efficiency?

Firm produces on AC curve

When is a firm x-efficient?

Output on AC curve

When is a firm x-inefficient?

Output above AC