Microeconomics Theme 3 test 1

Revenues

the payments firms receive when they sell the goods and services they produce over a given time period.

TR

P*Q

MR

𝛥TR/𝛥Q

AR

TR/Q

Price taker

the firm has no influence/control over the price at which its output is sold. This arises in perfectly competitive markets where any quantity of output of the firm is sold at the market price.

Price maker

the firm does have some degree of influence/control over the price its output sells for

AR curve for price taker

As they receive the same price for each unit of output regardless of the firm’s quantity of output, the P = AR curve is a horizontal straight line at value of the price.

AR curve for price maker

MR becomes negative after TR’s maximum - at the

Short run

the timeframe where at least one factor of production is fixed in quantity

long run

all factors of production can be varied in quantity by the firm

fixed costs

costs which remain constant regardless of the quantity of output produced by the firm

Variable costs

costs which vary as quantity of output produced changes

• pure variable costs are directly proportional to quantity of output

• ‘quasi’ variable costs are correlated with quantity but not necessarily directly proportional

the ‘law’ of (at first increasing,) and then diminishing marginal return

as variable inputs are added to a fixed resource the marginal product is at first, positive and increasing but after a certain point, marginal product begins to decrease

Marginal cost curve

the MC curve is initially falling, because as the firm experiences at first increasing marginal returns to its inputs the change in total costs arising from producing just one more unit of output decreases

However, once the firm begins to experience diminishing marginal returns, the MC curve starts to rise

Thus the shape of the MC curve results from the law of…. marginal returns

Sketching MC and AC

MC must always cut AC at the minimum point on the graphs due to the mathematical relationship between the marginal and the average

increasing returns to scale

output increases more than in proportion to the increase in all inputs

avg cost falls

constant returns to scale

output increases in teh same proportion as the increase in all inputs

avg costs ==

decreasing returns to scale

output increases less than in proportion to the increase in all inputs

avg costs rise

LRAC curve

the envelope tracing the lowest achievable average cost at every output

typically U shaped

Economies of scale on left side

Minimum efficient scale at minimum point and productive efficiency is achieved

diseconomies of scale on right side

internal economies of scale

factors that cause a firm’s avg costs to fall as it increases its own scale of production

e.g.

purchasing

managerial

marketing

risk bearing

diseconomies of scale

arising mainly from the inability of management to control a very large organisation, causing avg costs to rise

e.g.

control

coordination

cooperation

external economies of scale

when the whole industry in which a firm operates grows in size

shifts avg cost curve downwards

e.g.

better local infrastructure

lower training costs

government support

explicit costs

a transaction that has measurable cost to a firm

implicit costs

a decision which leads to lower income, but is not recorded on the balance sheet