What is revenue?
Total earnings from sales
How do u calculate the total revue, average revenue and marginal revenue?
Total revenue = price X output
Average revenue = TR divided by Q
Marginal revenue = change in TR divided by change in output
What is marginal revenue?
The revenue earned from the sale of one more unit, or the addition to TR when 1 more unit is sold
What is the profit maximising rule?
To maximise profits a firm will produce the quantity level where it’s MC=MR
What is the role of profits?
- It re-allocates resources as though they are being guided by an invisible hand (Adam smith)
- Encourages : competition/ cost control / price increases
- It is the residual return to owners for providing capital and bearing risks
- It is the prime mover of an enterprise state which allocates resources among competing uses according to demand
- It can be normal profit where revenue is the excess of variable cost
- It can be abnormal profit where revenue is in excess of total cost
- It generates funds for investe,not if ploughed back/ reinvested in the business
- On a macro level it is a source of income, therefore it contributes to the national income too.
What is a market?
An arrangement of buyers/sellers who agree to exchange their good/service for an agreed price
What is perfect competition?
This occurs when there are
- Many small firms
- Equal output size
- An identical product
- No brand names
- Free entry/exit
- Perfect knowledge
- Zero abnormal profit in the long run
- Infinitely elastic demand curve
- All is equal AC = AR = MC=MR
Explain business decisions under perfect competition
There is ample supply of factor inputs there is no restrictive factor of prices and so firms can allocate resources freely
Fixed capital is relatively low making entry and exit easy
All firms have equal access to resources and perfect knowledge of the market
What is imperfect competition?
Monopolistic competition
Oligopoly
Monopoly
What is oligopoly?
- This exists when there are a few giant firms
- A 2 way pull (competition and collusion meaning conspiracy together)
- A market dominated by a few firms
What is a monopoly ?
Where we have a unique product being sold by a single firm and where there are no close substitutes
What is price discrimination in the 3 degrees?
First degree: each customer is charged a different price for the same good/service according to his/her maximum
Second degree: last minute offers. Hop ons on flights with empty seats or vacant hotel rooms
3rd degree: consumer groups having features making them separable from others are grouped differently : sex, age, geographically, different price elasticities
