3.3 Costs, Revenues and Profits

Question 1

Define and formulate total revenue

Answer 1

The overall revenue gained from all sales
Price x quantity

Question 2

Define and formulate average revenue

Answer 2

Revenue generated per unit sold
Total revenue / quantity

Question 3

Define marginal revenue

Answer 3

The revenue gained from selling one more item

Question 4

What does it mean if a firm is a price “taker”

Answer 4

The firm is unable to influence the market price

Question 5

What two conditions make a price “taker”

Answer 5

They produce a good which is similar/identical to other firms
They have insufficient market share

Question 6

What does it mean if a firm is a price “setter”

Answer 6

The firm has some ability to set their prices higher or lower depending on business objectives

Question 7

What two conditions make a price “setter”

Answer 7

They have a greater market share
Their goods are more strongly differentiated from other firms

Question 8

Explain the concept of diminishing marginal productivity

Answer 8

As you add increasing amounts of a variable input to fixed inputs the marginal output starts to fall
Occurs in the short run

Question 9

Explain the concept of economies of scale

Answer 9

Economies of scale are the cost advantages exploited by expanding the scale of production
Occurs in the long run

Question 10

What is the difference between internal and external economies of scale

Answer 10

Internal - Increases in the size of the firm due to internal reasons
External - Increases in the size of the industry or a wider change in the economy which allows firms in the industry to grow their scale

Question 11

Explain technical economies of scale

Answer 11

These Economies arise from the increased use of large scale mechanical processes and machinery

Question 12

Explain commercial economies of scale

Answer 12

Large firms can negotiate favourable prices as a result of buying in bulk, they can also gain lower transport costs because more products are moved with each shipment

Question 13

Explain financial economies of scale

Answer 13

Bigger firms can borrow money and generate funds more cheaply than small firms, they usually have more valuable assets which can be used as security and more credit worthy by lenders

Question 14

Explain managerial economies of scale

Answer 14

Large scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources

Question 15

Explain risk-bearing economies of scale

Answer 15

Large firms can bear business risks more effectively than smaller firms

Question 16

Explain the minimum efficient scale of production

Answer 16

This is the minimum amount of output required to be productively efficient (Lowest AC)

Question 17

Define normal profit

Answer 17

The amount of profit required to keep factors of production in their current use

Question 18

Define supernormal profit

Answer 18

Any profit greater than normal profit