3.3 - Revenue costs and profits
Revenue
Total Revenue (TR) = price (p) x Quantity sold (Q)
Average Revenue (AR) = Total Revenue (TR) / Quantity sold (Q)
Marginal Revenue (MR) - how much you lose or make for selling one extra unit of a good
Linked to PED, When marginal revenue is positive, demand is elastic; and when marginal revenue is negative, demand is inelastic.
Costs (SR)
There are various types of business costs
Marginal costs
Total costs - fixed costs x variable costs
Variable costs - do vary with output
average costs - total costs / quantity sold
Fixed costs - doesn't vary with output in the SR
This table should help understand it better
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ATC falls because the fixed cost is spread out over more units (this is known as EOS)
In the SR better productivity may lower costs
Productivity = output / worker or output / input
After a while DMR sets in
DMR = diminishing marginal returns - after the optimum capacity is reached, additional factors of production decreases output
The decline in marginal output after optimal productivity is reached
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EOS
When DMR sets in the marginal costs will rise
Economies of scale - a fall in average costs as output rises
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From O to A, the firm sceives EOS
causes of internal EOS
Marketing EOS - spreads cost of marketing over a lot of output to the relative cost is negligible
Managerial EOS - better manger means more profits
Financial EOS - can issue shares and are more likely to get a low interest loan
Technology EOS - specialist equipment lowers VC
Commercial EOS - large firms can build buy and get a better deal per unit
From A to B the firm achieves MES or scotant returns
Minimum efficiency scale - the lowest point on the MC curve
From B onwards, the firm archives dis-EOS
The lower the MES the more competitive your firm is
Slowness - it can take large firm longer to respond
X-inefficiency - lack of competition may cause costs to rise
Unwieldiness - large firm can become difficult to manage so decisions etc..take longer to implement
Communication - worker often wit for responses to other workers to complete their task before they can carry on
Lack on engagement - causes less loyalty which could increase the number of days taken of and decrease productivity
External EOS - government intervention
The government can intervene with factors like; ferlow, infrastructure and lower taxes to help a firm achieve EOS of dis-EOS
AC shifts
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An increase in AC (AC1 to AC3) tends to be due to government policy (rules and regulations) and often casues smaller firm to drop as they can't compete anymore. This results in less competition and choice for the consumers
A decrease in AC (AC1 to AC2) makes a market more contestable. The reduced costs means more firm can enter the market which is good for the consumer but bad for the existing firms.
Profit
Profit = TR - TC
Normal profit (NP) - where P=MR=MC. This includes a return on your opportunity costs and is enough to stay in the market
Abnormal profit (AP) - when P > MC
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Most firm will stay in the market assuming they can cover their variable costs. This is between AVC and AC