3.3

Question 1

Define total revenue

Answer 1

The revenue recieved from the sale of a given level of output
Price x Quantity sold = total revenue

Question 2

Define average revenue

Answer 2

The average receipt per unit (the price each unit is sold for)
Total revenue/ quanitity sold

Question 3

Define marginal revenue

Answer 3

The extra revenue a firm earns from the sale of one extra unit. When it is at zero, the total revenue is maximised

Question 4

Explain how price elasticity of demand will influence the average revenue curve of a firm

Answer 4

In markets where firms are price takers, AR curve is horizontal. This shows the perfectly elastic demand for their goods. In markers where firms are price makers, the AR curve is downward sloping

Question 5

Explain the meaning of a firm being a ‘price taker’ (including the conditions when this will occur)

Answer 5

Some firms are unable to influence the market price
These firms are refferd to as price takers
This is true if-
They produce a good which is similar/ identical to other firms (homogenous good)
They have an insignificant market share

Question 6

Explain the meaning of a firm being a ‘price setter’ (including the conditions when this will occur)

Answer 6

Most firms have some degree of ability to set their price higher or lower, depending on their business objectives
These firms are reffered to as price setters
The more strongly differentiated a firms goods are, the more price setting power they have
The greater the market share a firm controls, the more price setting power they will have

Question 7

Explain the concept of diminishing marginal productivity

Answer 7

Occurs in the short run thus (at least) one factor of production is fixed
Beyond a certain point, new workers will not have as much capital equipment to work with so it becomes diluted among a larger workforce ‘dilution of capital’
When marginal product starts to fall, it becomes more expensive to produce an additional unit of output and so marginal cost and average cost eventually starts to rise

Question 8

Whats the difference between internal and external econonomies of scale

Answer 8

Internal - occurs when an individual firm gets lower average costs as it scales up production
External- Occurs when the entire industry gets lower average costs as the industry expands eg lower labour costs

Question 9

Explain and give an example of technical economies of scale

Answer 9

These EOS arise from the increased use of large scale mechanical processes and machinery
eg expensive machinery used in printing millions of newspapers in the UK every week

Question 10

Explain and give an example of commercial economies of scale

Answer 10

large firms can bulk buy from suppliers leading to better deals
eg walmart pays a very low price to its suppliers and is thus able to keep its prices low

Question 11

Explain and give an example of financial economies of scale

Answer 11

Large firms can issue shares on the stock market and can do deals with lenders to borrow at a lower rate of interest. Since they have more collateral, regarded as lower risk than small firms as they have more assets that could be sold to pay off debt

Question 12

Explain and give an example of managerial economies of scale

Answer 12

Large-scale manufacturers employ specialists to supervise production systems, manage marketing system and oversee human resources
eg more efficient invetory management practices can reduce average unit costs, such as JIT

Question 13

Explain and give an example of risk-bearing economies

Answer 13

Large firms can spread risks by diversification. They can sell a wider range of goods or sell in a wider range of markets eg by selling in different countries

Question 14

Explain the reasons for diseconomies of scale

Answer 14

Occur when a business grows so large that the costs per unit increase. As output rises, it is not certain that unit costs will fall.
Diseconomies of scale usually occur as a result of the difficulties of managing a larger workforce
Lack of motivation- workers feel more isolated and less appreciated in a larger business and so their loyalty and motivation may diminish
Loss of direction and coordination - harder to ensure that all workers are working for the same overall goal and the business grows. More difficult to monitor each employee

Question 15

Explain the concept of minimum efficient scale of production

Answer 15

The minimum amout of output required to be productively efficient eg the output at which a firms long-run average cost curve stops falling
This is important as if the minimum efficient scale of production is a very high output, this then acts as a barrier of entry for new firms

Question 16

Explain the differnce between normal and supernormal profits

Answer 16

Normal profit is the amount of profit required to keep factors of production in their current use. On a diagram normal profit is earned when AR=AC (also TR=TC)
Supernormal profit is any profit above normal profit

Question 17

Explain the role of barriers to entry in determining whether normal or supernormal profits can be earned in the long run

Answer 17

When there are no barriers to entry, the presence of supernormal profits will attract new firms to join
When there are significant barriers to entry, it should be possible for firms in an industry to earn a supernormal profit in the long run

Question 18

Explain the meaning of ‘shut down point’

Answer 18

Where price is equal to average variable cost and thus the business is no longer viable. If AVC is not covered then the firm will shut down in the short run

Question 19

Explain the conditions under which a firm would reach ‘shut down point’ in the long run

Answer 19

In the long run a loss making firm will shut down. As all factors are viable, there are no longer any fixed costs, so if AR<AC they are better of leaving the industry

Question 20

When does profit maximising occur

Answer 20

When marginal cost = marginal revenue. This is so that each extra unit produced gives no extra loss or revenue