Microeconomics Notes 1.5.1: Cost, Revenue, and Profit Theory

Long run

________ is the period of time in which all factors of production are variable.

Short run

________ is the period of time in which one factor of production is fixed.

TFC

Total fixed cost (________) Total cost of fixed assets that a firm uses in a given time period.

normal profit

Price at which a firm is able to make ________ in the long run.

maximum profits

Satisficing refers to acceptance of less than ________ in order to pursue other objectives.

Loss

________ ● Also known as negative economic profit.

Growth maximization

________ Companies focus on gaining larger market share and dominating the market in the long run rather than achieving profit maximization.

additional units of output

● It is the same whether a firm produces one or ________.

△TR

Where ________ is the change in total revenue and △q is the change in quantity of product sold in a given time period.

Average revenue

________ Revenue that a firm receives per unit of its sales.

TFC

Number of fixed assets* Cost of each fixed asset.

Constant returns

Happens when long- run unit costs are constant as output increases.

minimum revenue

It is the ________ needed to keep the firm in business.

Total revenue

Total amount of money that a firm receives from selling certain amount of good or service in a given time period.

● MP

________= △TP △V Where △TP is the change in total product and △V is the change in number of units of variable factors employed.

Total cost

________ of all fixed and variable factor used to produce a certain output.

Revenue maximization

________ Some owners might maximize their sales revenue by producing where MR= 0.

Normal profit Zero economic profit

________ is the amount of revenue needed to exactly cover all of the economic costs.

Economic profit Abnormal profit

________ is a level of profit that is greater than that required to ensure that a firm will continue to supply its existing product.

marginal revenue

Profit- maximizing level of output is the level of output where ________ is equal to marginal cost, and marginal cost is rising.

● TVC

________= Number of variable factors* Cost of each variable factor.

Normal profit

________ ● Also known as zero economic profit.

1.5.1

Cost, Revenue and Profit Theory (HL only) Definitions 1

● There are many types of economies of scale, such as

❖ Specialisation ★ In small firms, the managers take on many roles in the business

● There are different types of diseconomies of scale that affects a firm, such as

❖ Control and communication problems ★ As firms grow in scale, the management will find it harder to control and coordinate the activities of the firm → Inefficiency → Increase in unit costs of production

Profit theory Total profit = Total revenue

Economic cost (Explicit cost + Implicit cost)

During the year they have

● Paid $40,000 in wages and salaries

In addition

● The firm uses its own machinery, which has reduced in value by $20,000 because of wear and tear and now has a second hand value of $70,000