3:2:1 Revenue, Costs And Profits Flashcards
What is Total Revenue also called?w
- Turnover
- Sales Revenue
What is Total Revenue?
Is the amount the firm received from all its sales over a certain period.
What is the Total Revenue Equation?
Total Revenue = Price X Quantity
What is Average Revenue also called?
Revenue per unit
What is Average Revenue?
Is how much people pay per unit (price) also the demand curve
What is the Average Revenue Equation?
Average Revenue = (Total Revenue) / (Quantity)
What is Marginal Revenue?
The change in total revenue from selling one more unit
What is the Gradient of the Total Revenue Curve?
Marginal Revenue
Both average revenue and marginal revenue tend to be […………….]
Downward sloping
How do you calculate Price Elasticity of Demand?
(Percentage Change in Quantity demanded) / (Percentage Change in price)
What to remember when calculating Price Elasticity of Demand?
Ignore the negative signs
Price Elasticity of Demand - What does a value greater than 1 tell us?
Relatively Price Elastic
Price Elasticity of Demand - What does a value that is less than 1 tell us?
Relatively Price Inelastic
What does it mean when Demand is inelastic?
Rise in price leads to a rise in total revenue / demand
What does it mean when demand is elastic?
A fall in price leads to a rise in total revenue
Hat does it mean when Demand is perfectly inelastic?
PED = 0
A given change in price will result in the same revenue change
The Price Elasticity of Demand along a […………………………] will vary.
Straight line demand curve
At [………] prices, a reduction in price will have an elastic price response.
High
At [….] prices, a reduction in prices will lead to a rise in total revenue.
Lower
Demand is price [……….] at lower prices
Inelastic
What is the Percentage Change Equation?
(New Value - Old Value) / Old Value
What can we say about the elastic part of the Demand curve?
If firms lower their prices then total revenue increases and if they raise their prices total revenue falls
What can we say about the inelastic part of the Demand curve?
If the firm lowers prices then it will cause a fall in revenue and if the firm raises prices then it will cause a rise in revenue
What is meant by Short Run Costs?
The time period in which at least on factor of production (land, labour, capital and enterprise) is fixed - it cannot be changed even if there is a change in demand.
What are Long Run Costs?
The time period in which all factors of production are variable
What are the explanation for long run and short run costs?
Economies and Diseconomies of scale
What are Fixed Costs?
Costs that do not vary with output
What are Variable Costs?
Costs that vary with output
What is the difference between the time scale, short and long run, if Fixed and Variable Costs
Fixed Costs only happen in the long run
Variable Costs happen both in the long and short term
What are Fixed Costs also known as?
Overheads
What are Total Fixed Costs and Total Variable Costs together known as?
Total Costs
How are Average Fixed Costs calculated?
Fixed Costs / Output
What will happen to Average Fixed Costs as Output increased?
Average Fixed Costs will continue to fall because the cost is being spread across a greater output
What is the Average Variable Cost Equation?
Variable Costs / Output
Question - What is the Average Variable Cost of a Firm that’s total variable cost £5000 and it produces 100 units?
AVC = £5,000 / 100 = £50 per unit
How do you calculate the average total cost? (AC)
Average Fixed Cost + Average Variable Cost
Or
Total Cost / Quantity Produced
Define Average Costs.
Average costs per unit of output
Define Marginal Cost.
Change in total costs when one more unit of output is produced
Marginal Cost is the Gradient of which curve?
Total Cost curve
What is unusual about the Marginal Cost?
Marginal Costs always goes through the minimum point of the average variable cost and average total cost curves
What happens to the gap between average costs and average variable costs as output rises?
It gets smaller
Explain the shape of the Average Cost Curve?
- Average costs start relatively high, because at low levels of output total costs are dominated by the fixed cost.
- Average total cost then declines, as the fixed costs are spread over an increasing quantity of output
- But as output expands further, the average cost begins to rise because of diminishing returns
What is Economies of Scale?
A fall in long-run average costs as output increases
What is Financial Economies of scale?
As a firm grows, it is better to be able to access loans at low costs. So they get better rates of interest
What is Rick Bearing Economies of Scale?
As a firm expands, it is better able to develop a range of products and a wider customer base to spread risk and minimise the effect of any downturn
What is Marketing Economies of Scale?
A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market.
What is Managerial Economies of Scale?
As a firm expands, it is in a position to employ a specialist managers in finance etc therefore increase productivity and decrease long-run average costs
What is Increased Dimensions Economies of Scale?
Increasing the amount transport vehicles can carry
Does economies of scale relate to the long or short run?
Long run only (Only when all factors are variable in the short run)
What are Internal Economies of Scale?
Occur when an individual firm expands
What are some examples of Internal Economies of Scale (Already Covered) ?
Financial Economies Risk-Bearing Economies Marketing Economies Managerial Economies Increased Dimensions
What is External Economies of Scale?
Have an impact on the entire industry.
Examples of External Economies of Scale?
- Industry may benefit as a result of innovations produced by other firms causing firm average costs to fall
- Retailers close to each other benefit from the development new roads and transport links
What is Diseconomies of Scale?
An increase in long-run average costs as output increases, often caused by managerial difficulties
When may a firm experience Diseconomies of scale?
If it grows too large and moves beyond its minimum efficient scale
Examples of actions that can cause diseconomies of scale?
- Firm merges with another
- Firm grows internally and lacks management experience
- ## Lack of co ordination between departments
Derive how the long-run average cost curve is formed?
It is made up of many short-run average cost curves joined together at their lowest points
In the short run how many factors are fixed?
At least one
In the long run how many factors are fixed?
NONE
Do Fixed costs change with output?
NO
When do Fixed Costs actually exist?
In the short RUN!
What are Fixed Costs?
The costs which don’t vary with changing output.
What are Variable Costs?
Costs which depend on the output produced.
What’s is the Total Costs (TC) Equation?
Fixed Costs + Variable Costs
