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    Costs, Revenues and Profits

    Uploaded by

    Divya Mathew-Abraham
    This document defines key economic concepts related to costs, revenues, and profits. It explains that total costs are made up of total fixed costs and total variable costs. Average costs are calculated by dividing total costs by quantity. Marginal cost is the change in total costs from producing one more unit. Total revenue equals price times quantity, while average revenue is total revenue divided by quantity. Marginal revenue is the change in total revenue from selling one more unit. There are normal profits and supernormal profits. Profit maximization occurs at the quantity where marginal revenue equals marginal cost.

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    Costs, Revenues and Profits

    Uploaded by

    Divya Mathew-Abraham
    89 views2 pages
    This document defines key economic concepts related to costs, revenues, and profits. It explains that total costs are made up of total fixed costs and total variable costs. Average costs are calculated by dividing total costs by quantity. Marginal cost is the change in total costs from producing one more unit. Total revenue equals price times quantity, while average revenue is total revenue divided by quantity. Marginal revenue is the change in total revenue from selling one more unit. There are normal profits and supernormal profits. Profit maximization occurs at the quantity where marginal revenue equals marginal cost.

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    This document defines key economic concepts related to costs, revenues, and profits. It explains that total costs are made up of total fixed costs and total variable costs. Average costs are calculated by dividing total costs by quantity. Marginal cost is the change in total costs from producing one more unit. Total revenue equals price times quantity, while average revenue is total revenue divided by quantity. Marginal revenue is the change in total revenue from selling one more unit. There are normal profits and supernormal profits. Profit maximization occurs at the quantity where marginal revenue equals marginal cost.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    89 views2 pages

    Costs, Revenues and Profits

    Uploaded by

    Divya Mathew-Abraham
    This document defines key economic concepts related to costs, revenues, and profits. It explains that total costs are made up of total fixed costs and total variable costs. Average costs are calculated by dividing total costs by quantity. Marginal cost is the change in total costs from producing one more unit. Total revenue equals price times quantity, while average revenue is total revenue divided by quantity. Marginal revenue is the change in total revenue from selling one more unit. There are normal profits and supernormal profits. Profit maximization occurs at the quantity where marginal revenue equals marginal cost.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Costs, Revenues and Profits 1

    Revision Notes: Costs, Revenues and Profits


    Costs:

    TC = TFC + TVC

    AC or ATC = TC/Q or (AFC + AVC)/Q

    Marginal cost (MC): The change in TC from producing one more unit (TC/Q)

    Revenues:

    TR = PQ (price x quantity)

    AR = TR/Q = P

    Therefore, price and average revenue are the same value.

    e.g. in a Perfectly competitive market

    PRICE QUANTITY TOTAL REVENUE AVG. REVENUE


    5 1 5 5
    5 2 10 5
    5 3 15 5
    5 4 20 5

    e.g. In a monopoly or oligopoly market

    PRICE QUANTITY TOTAL REVENUE AVG. REVENUE


    10 1 10 10
    9 2 18 9
    8 3 24 8
    7 4 28 7

    Marginal revenue (MR): The change in TR from selling one more unit of output
    (TR/Q)

    Profits:

    Two types of profits:


    -Normal profits
    -Supernormal profits

    Normal Profits
    Defined as just enough profit to keep the owner interested in staying in the market.
    Normal profits exist at a price where AC=AR

    Divya Mathew
    Supernormal Profits
    Any level of profit above normal profit where levels of profit/output where AR>AC

    Profit Maximisation

    Profits are maximised at the price/output where MR=MC (Q*) – see diagrams in eco
    folder.

    This is because when producing and selling the marginal output at any level below
    MR = MC, revenue will contribute to profit and thus profit increases and this is true
    all the way up to Q*. Producing at Q < Q* would therefore yield lower profit.

    Producing and selling the marginal output at any level above Q*, we will find that
    the marginal output is being sold at a loss and therefore total profit will decrease.
    This is true for any output > Q*

    Therefore, profit maximisation level is at MR = MC.

    Time: Short Run and Long Run

    Short run: Factors of production (FoP) are fixed, however the only factor that is
    remotely variable is LABOUR. Hence, the first route to increase output is to increase
    labour.
    Overtime however, the marginal units of labour will add less and less to TP to cause
    AP to fall. This will ultimately cause AC to rise, this phenomenon is called the
    Diminishing Marginal Returns to a variable factor (labour in this case) and hence it
    is the reason why AC curves are U-shaped.
    (see diagrams in eco folder)

    NOTE: MC curves ALWAYS intersect the AC curves at its lowest point.

    It is impossible to quantify the SR and LR of businesses as they will be different for


    each, however, we can say that in the SR, factors (apart from labour) are fixed and in
    the LR they can be varied.

    Economies of Scale (EoS) means that the growth of the business as a result of
    increasing the scale of production has led to a decrease in LRAC

    Diseconomies of Scale (DoS) means that the growth of the business as a result of
    increasing the scale of production has led to an increase in LRAC

    DoS are not desirable as it makes businesses less competitive; they’ll attempt to
    reduce/delay the onset (for e.g. through rationalisation).

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