Costs and revenue

Microeconomics 1.5.1 Theory of the firm Note sheet .docx

Key learning outcomes:

To understand the relationship between average and marginal values eg between average and marginal product.

To explain the concept of diminishing returns and how this affects a firm's costs of production.

Now draw the AP and MP curves

Where does diminishing marginal returns set in?

Costs, revenue and profits.

Please make a copy of the sheet and then complete the tables:

student template

AV Product mc.pptx

The Nature and Role of Profits.ppt

The difference between accounting and Economic profits- an example

Wages= $ 40, 000

Raw materials= $ 100,000

Own the factory which they have been offered 90,000 by another firm to rent it from them

Electricity costs= $ 40,000

Total revenue = $ 450,000

Depreciation costs= $ 20,000

Owner has given up their previous job to run the company. In her previous job she was paid $ 70,000

The owner put $ 60,000 of their own money into the business. Present savings rates are 5% at the bank.

Identify the accounting and economic profit for the firm

So from the powerpoint above you should now realise that firms will in the long run leave the industry if they are not making at least normal profits. However it is not unusal to see firms in the short run, remain in the industry. But to do this they must at least cover their variable costs. If P<AVC then a firm will leave the industry in the short run. This is covered on P96-7 in the textbook. Read this section and in particular copy diagram 6.12.

A numerical example:

There are two hotels- A and B. Both are making a loss of $1M. Given the following figures one will leave in the short run and one will stay. Which is which?

Hotel A

Hotel B

TFC

0.5M

TVC

2.5M

Loss

https://t.co/aiSM0kzg5L So what is the SR shut down price??

— Peter Oldfield (@PeterOldfield1) January 25, 2016

But do all firms wish to maximise short run profits?

read and make notes from P 99 in your textbook. Split into groups each one has to find an example of revenue maximisation; growth maximisation; satificing and Corporate Social Responsibility.

Essay Assignment:

Why do short-run marginal costs eventually rise? (10)

Why may long-run average cost curves be "L-shaped"? (10)

Some scaffolding for your essay:

(1) Introduction. Explain the title.

(2) Define the short run.

Define MC.

Outline the theory which is important (the law of diminishing returns) and provide a definition.

(3) Develop the law of diminishing returns to the point where you provide the standard diagram showing the relationship between marginal product and average product.

(4) Develop the law to illustrate its impact upon costs which is best done by use of a simple numerical example (but a simple, clear exposition is just as good).

Illustrate this by drawing the standard diagram showing the relationship between short-run marginal and average costs.

(5) Define the long run.

Outline the theory which is important, i.e. economies and diseconomies of scale. Define and provide an explanation of each.

Provide the standard diagram illustrating the above.

(6) State that some observers believe that firms can prevent diseconomies of scale from setting in.

Explain their reasoning.

Provide the standard diagram illustrating a long-run, "L-shaped" average cost curve.

(7) Conclusion.

It is imperative that all diagrams are explained. Examiners will interpret the lack of an explanation as a lack of understanding and will mark accordingly.

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