Marginal revenue: theadditional revenue gained from the next unit
When demand is price inelastic, you can raise prices and total revenue will also increase.
When demand is price elastic, firms can raise prices but total revenue will fall
3.3.2 Costs
Total cost = total fixed c$$ost + total variable cost
Total fixed cost: costs that do not vary with output e.g. rent
Total variable cost: costs that do vary with output e.g. ingredients/ wages
Average (total) cost = total total cost divided by output
Average fixed cost = totalfixed cost divided by output
Average variable cost = total variable cost divided by output
Marginal cost: the additional cost of producing one extra unit of output
Short-run: when there is at least one fixed factor of production.
Long-run: when all factors of production are variable.
The Law of Diminishing Marginal Productivity: in the short-run (where there is at least one fixed factor), as variable factors of production are added to a stock of fixed factors of production, marginal and therefore total output will rise and then fall e.g. adding more farmers to a fixed area of land.
The short-run cost curves are derived from the law of diminishing returns, and the way total product goes up and down.
Average cost curve: U-shaped
Marginal cost curve: tick shaped
Average revenue: downward sloping
Marginal revenue: twice as steep as the AR curve
3.3.3 Economies & Diseconomies of Scale
Economies of scale: when long-run average costs fall as output increases.
Really Fun Mums Try Making Pies
Risk (attempting a new recipe)
Financial (cheaper access to finance)
Marketing (slogans for large brands like 'Just Do It')
Technical (self checkout machines)
Managerial (each specialist manager oversees more people)
Purchasing (lower cost of bulk-buying)
Diseconomies of scale: when long run average costs rise as output increases.
coordination (difficult to manage staff)
communication (workers feel alienated)
Minimum efficient scale: the minimum level when a firm can first start to exploit maximum economies of scale.
Internal economies of scale: reasons why one firm benefits from lower average costs.
External economies of scale: reasons why an entire industry benefits from lower average costs.
Examples: better infrastructure e.g. transport links, education and training (skilled workers),
3.3.4 Normal Profits, Supernormal Profits & Losses
Profit maximisation: MC = MR
Normal profit: the minimum level of profit required to keep a firm in the industry. TR = TC
Supernormal profit: when a firm is earning more than enough to cover all costs, including the opportunity cost of the resources used. TR > TC
Supernormal loss: TR < TC.
Short-run shutdown points: when a firm cannot cover its variable costs.
