Output, Costs, Revenues and Profits

Primary sector

Extracting raw materials

Secondary sector

Use raw materials to produce G+S

Tertiary sector

Distribution and retail→ meet the needs of the consumers

Quaternary sector

R+D

Very Short Run

Time when all FoP are fixed and so changes in output are not possible, perfectly inelastic supply

Short Run

At least one of the FoP are fixed (usually land or capital), changes in output are limited, inelastic supply

Long Run

All FoP can be changed with relative ease, changes in output are easy, elastic supply

Law of diminishing returns

As VF increases, total output will increase until the point of maximum yield at which point there will be negative returns

due to the law of diminishing returns, in the SR, a firm will become less

efficient

Marginal Cost (MC)

Change in total costs/Change in output

Shape of MC

Tick shape (lowest point is the point of diminishing returns)

Fixed costs

Costs that do not change with output (e.g. rental costs, interest payments)

Total Fixed Costs (TFC) shape of curve

Straight horizontal line

Average Fixed Costs (AFC) shape of curve

TFC/output, Start from TFC line and slowly go down in an L shape never touching the x axis

Variable Costs (VC)

Costs that vary directly with output (e.g. stock, raw materials, transport)

Total Variable Cost (TVC) shape of curve

Rocky mountain shape with one bump in the middle

Average Variable Cost (AVC) shape of curve

U shape where the lowest point is the point of productive efficiency and their costs are the lowest they can

Average Total Costs (ATC) shape of curve

U shape higher than AVC so that the gap between them is the AFC

Total Cost (TC) Shape of curve

Rocky mountain shape parallel to TVC

Where does MC cross ATC and why?

Crosses ATC at its minimum point as that is the point of productive efficiency

What does the SRAC and LRAC curves look like and illustrate

Lots of U shapes curves touching each other (SRAC) and a long U shaped curve touching each of their minimum points (LRAC). It illustrates falling costs of a firm when they expand without incurring losses in efficiency associated with SR capacity constraints.

Economies of scale

Cost advantages that a business can exploit by expanding their scale of production

Technical economies of scale

Investing in expensive and specialist capital machinery

Specialisation of the workforce

Boosting productivity

Purchasing (marketing) economies of scale

Purchase its inputs in bulk at lower prices

Financial economies of scale

Larger firms tend to be rated as more ‘credit worthy’ and have lower rates of interest etc

Managerial economies of scale

Afford more specialised and skilled managers that can reduce the average COP

Diseconomies of scale:

Communicational difficulties, organisational difficulties, poor customer/employee relations

P(AR) x Q=

TR

Change in TR/change in Q=

MR

TR graph when there’s perfectly elastic demand

diagonal line from bottom left to top right

AR and MR graph when there’s perfectly elastic demand

Straight horizontal line for both of them because any additional units sold generate the same revenue as the previous unit

To increase TR when D is inelastic they should _______ price

Increase

To increase TR when D is elastic, they should _________ price

decrease

Under normal demand, TR graph?

Goes up then down, like diminishing returns graph

Under normal demand, MR graph?

Negative linear graph that goes negative. Equals 0 when TR is at its maximum

Under normal demand, AR graph?

Less steep than MR but from the same starting point

Total revenue- total cost=

total profit

Economic profit

TR- (TC+opportunity cost)

Normal profit

TR=TC

Supernormal/Abnormal profit

TR>TC

Loss

TR<TC

Two ways to find profit max

1) Level of output where TR-TC is the greatest

2) Level of output where MR=MC

After profit maximising point, what is the relationship between TR and TC

TR is increasing at a slower pace than TC, eventually TC>TR and into a loss.

Reasons why a firm may not profit maximise:

Other objectives (environmental), subsidisation, cannot be calculated accurately

When drawing Costs revenue and profit diagram, what are the 4 lines to draw?

MR, MC, AR, ATC

Important things to remember when drawing the diagram?

MR goes negative

MC hits ATC at its minimum

Depending on which type of profit, @ Qmax: AR=ATC (normal), AR>ATC (supernormal), AR<ATC (loss)