Economics Short Run Vs Long Run Costs Questions Medium
The concept of average revenue of capital refers to the amount of revenue generated by each unit of capital invested in a business. It is calculated by dividing the total revenue by the total capital invested.
In the short-run, the average revenue of capital is an important factor in determining the profitability of a business. If the average revenue of capital is higher than the cost of capital, it indicates that the business is generating enough revenue to cover its capital costs and is therefore profitable. On the other hand, if the average revenue of capital is lower than the cost of capital, it suggests that the business is not generating enough revenue to cover its capital costs and may be operating at a loss.
In the long-run, the average revenue of capital is closely related to the concept of economic profit. Economic profit takes into account both explicit costs (such as wages, rent, and materials) and implicit costs (such as the opportunity cost of using capital in a particular business instead of alternative investments). If the average revenue of capital is higher than the economic cost of capital, it indicates that the business is earning a positive economic profit. Conversely, if the average revenue of capital is lower than the economic cost of capital, it suggests that the business is not earning a positive economic profit and may need to consider alternative investment opportunities.
Overall, the average revenue of capital provides insights into the profitability and economic viability of a business in both the short-run and long-run. It helps decision-makers assess the efficiency of capital allocation and make informed choices regarding investment and resource allocation.