3.3 Revenues, costs, and profit
Revenue- income generated from the sale of output in goods and services markets
Revenue maximisation- when MR = zero (i.e. when price elasticity of demand = 1)
Total revenue- refers to the amount of money received by a firm from selling a given level of output and is found by
multiplying price (P) by output i.e. number of units sold
Average revenue (AR)= average price per unit sold
Marginal Revenue (MR)= The change in revenue from selling one extra unit of output
Marginal revenue product- measures the change in total revenue for a firm from selling the output produced by
additional workers employed
Sales maximisation- AR=AC
Profit maximisation - Profit maximisation occurs when marginal cost = marginal revenue (MC=MR)
Variable cost- business costs that vary directly with output since more variable inputs are required to increase output
Fixed costs- costs that don’t vary directly with level of output i.e. they are treated as exogenous or independent of
production
Average fixed cost= TFC/ Q
Marginal cost- the change in total costs from increasing output by one extra unit
Cost synergies- cost savings that a buyer aims to achieve as a result of taking over or merging with another business
Dimishing marginal productivity- As more of a variable factor (e.g. labour) is added to a fixed factor (e.g.capital), a
firm will reach a point where it has a disproportionate quantity of labour to capital and so marginal product of labour
falls- raising marginal costs
Long run- a period of time when all FOP are variable and business can change the scale in production
Short run- a time period where at least one FOP is in fixed supply. Machinery= fixed
Sunk costs- cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market
less contest
Satisficing behaviour- maximising behaviour may be replaced by satisficing which in essence involves the owners
setting minimum acceptable levels of achievement in terms of revenue and profit.
Allocative efficiency- value that consumers place on good or service = cost of resources used up in production.
price = marginal cost.
Productive efficiency- a business in a given market or industry reaches the lowest point of its average cost curve.
Output is being produced at minimum cost per unit - efficient use of scarce resources, high level of factor productivity
Dynamic efficiency- occurs over time- focuses on changes in the consumer choice available in a market together with
the quality/performance of goods and services that we buy
, Constant returns- when LRAS remains constant as output increases because output is rising in production to inputs
used in production process
Economies of scale- falling LRAC as output increases in the long run
Diseconomies of scale- a business may expand beyond the optimal size in the l/r and experience DEOS- rising LRAS
Excess capacity- the difference between current output of a business and total amount it could produce in the current
time period
Experience curve- falling unit costs as production of a product or service increases because the company learns more
about it, workers become more skillful
External economies of scale- expansion of an industry is the development of ancillary service which benefits applied in
the industry causing a downward sloping industry supply curve. A business might benefit from external economies by
locating in an area in which the industry is well established
External diseconomies of scale - when the growth of industries need to hire companies that are part of that industry
E.G. Increased traffic congestion higher cost of renting building
Minimum efficient scale- scale of production where internal economies of scale have been fully been exploited.
Corresponds to the lowest point on the LRAC curve
Returns to scale- in the long run, all FOP are variable. How output of a business responds to a change in factor inputs-
returns to scale
3.3.4
Supernormal/ abnormal profit- supernormal profits may be maintained in a monopolistic market in l/r due to BTE
Supernormal profit- when profit is above that requires to keep its reosurces in their present use in l/r. P> AC
Normal profit- transfer of earnings of the entrepreneur min reward necessary to kepp her in industry. Normal profit=
treated as fixed cost, included in the average but not marginal cost curve
Marginal profit- the increase in profit when one more unit is sold or the difference between MR and MC.
Monopoly profit- a firm is said to reap monopoly profits when a lack of viable market comp allows it to set its prices
above equilibrium price for a good without losing profits to competitors. Barriers to entry protect monopoly profit in l/r
Shut down price- s/r firm will continue to produce as long as total revenue covers TVC, P > AVC.
Revenue- income generated from the sale of output in goods and services markets
Revenue maximisation- when MR = zero (i.e. when price elasticity of demand = 1)
Total revenue- refers to the amount of money received by a firm from selling a given level of output and is found by
multiplying price (P) by output i.e. number of units sold
Average revenue (AR)= average price per unit sold
Marginal Revenue (MR)= The change in revenue from selling one extra unit of output
Marginal revenue product- measures the change in total revenue for a firm from selling the output produced by
additional workers employed
Sales maximisation- AR=AC
Profit maximisation - Profit maximisation occurs when marginal cost = marginal revenue (MC=MR)
Variable cost- business costs that vary directly with output since more variable inputs are required to increase output
Fixed costs- costs that don’t vary directly with level of output i.e. they are treated as exogenous or independent of
production
Average fixed cost= TFC/ Q
Marginal cost- the change in total costs from increasing output by one extra unit
Cost synergies- cost savings that a buyer aims to achieve as a result of taking over or merging with another business
Dimishing marginal productivity- As more of a variable factor (e.g. labour) is added to a fixed factor (e.g.capital), a
firm will reach a point where it has a disproportionate quantity of labour to capital and so marginal product of labour
falls- raising marginal costs
Long run- a period of time when all FOP are variable and business can change the scale in production
Short run- a time period where at least one FOP is in fixed supply. Machinery= fixed
Sunk costs- cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market
less contest
Satisficing behaviour- maximising behaviour may be replaced by satisficing which in essence involves the owners
setting minimum acceptable levels of achievement in terms of revenue and profit.
Allocative efficiency- value that consumers place on good or service = cost of resources used up in production.
price = marginal cost.
Productive efficiency- a business in a given market or industry reaches the lowest point of its average cost curve.
Output is being produced at minimum cost per unit - efficient use of scarce resources, high level of factor productivity
Dynamic efficiency- occurs over time- focuses on changes in the consumer choice available in a market together with
the quality/performance of goods and services that we buy
, Constant returns- when LRAS remains constant as output increases because output is rising in production to inputs
used in production process
Economies of scale- falling LRAC as output increases in the long run
Diseconomies of scale- a business may expand beyond the optimal size in the l/r and experience DEOS- rising LRAS
Excess capacity- the difference between current output of a business and total amount it could produce in the current
time period
Experience curve- falling unit costs as production of a product or service increases because the company learns more
about it, workers become more skillful
External economies of scale- expansion of an industry is the development of ancillary service which benefits applied in
the industry causing a downward sloping industry supply curve. A business might benefit from external economies by
locating in an area in which the industry is well established
External diseconomies of scale - when the growth of industries need to hire companies that are part of that industry
E.G. Increased traffic congestion higher cost of renting building
Minimum efficient scale- scale of production where internal economies of scale have been fully been exploited.
Corresponds to the lowest point on the LRAC curve
Returns to scale- in the long run, all FOP are variable. How output of a business responds to a change in factor inputs-
returns to scale
3.3.4
Supernormal/ abnormal profit- supernormal profits may be maintained in a monopolistic market in l/r due to BTE
Supernormal profit- when profit is above that requires to keep its reosurces in their present use in l/r. P> AC
Normal profit- transfer of earnings of the entrepreneur min reward necessary to kepp her in industry. Normal profit=
treated as fixed cost, included in the average but not marginal cost curve
Marginal profit- the increase in profit when one more unit is sold or the difference between MR and MC.
Monopoly profit- a firm is said to reap monopoly profits when a lack of viable market comp allows it to set its prices
above equilibrium price for a good without losing profits to competitors. Barriers to entry protect monopoly profit in l/r
Shut down price- s/r firm will continue to produce as long as total revenue covers TVC, P > AVC.
