3.3 costs, revenues and profits

Question 1

explanation of total product?

Answer 1

total product rises rapidly initially and then the rate decreases as the marginal product falls

Question 2

explanation of marginal product?

Answer 2

shows extra production from each worker, fall in marginal products helps to explain diminishing marginal productivity

Question 3

explanation of marginal cost?

Answer 3

shows extra cost of producing one more item, MC falls when MP rises and MC rises when MP falls

Question 4

explanation of total variable cost?

Answer 4

diminishing total of all marginal costs, MC is gradient of TVC

Question 5

explanation of average variable cost?

Answer 5

AVC = TVC/Q
average variable costs is total variable costs divided by output

Question 6

explanation of total fixed costs?

Answer 6

fixed costs are any costs which do not vary with output

Question 7

explanation of average fixed cost?

Answer 7

fall as output increases

Question 8

explanation of total cost?

Answer 8

overall cost of producing at a particular level of output
TC=TVC+TFC

Question 9

explanation of average cost?

Answer 9

average cost of production per unit
AC= TC/Q
AC= AVC+AFC

Question 10

what is short run?

Answer 10

period of time where at least one factor input is fixed

Question 11

where is long run?

Answer 11

period of time where all factor inputs are variable

Question 12

what is diminishing marginal productivity?

Answer 12

occurs in short run, add increasing amounts of a variable input to fixed inputs marginal output starts to fall, diminishing return to labour occurs when marginal product of labour starts to fall, new workers will not have as much capital equipment to work with, marginal product starts to fall becomes more expensive to produce an additional unit of output

Question 13

what are economies of scale?

Answer 13

occurs in long run, cost advantages exploited by expanding the scale of production in LR, reduce LR average costs over a range of output

Question 14

what are internal economies of scale?

Answer 14

increase in the scale of a firm due to internal reasons

Question 15

what are external economies of scale?

Answer 15

increases in the size of industry or a wider change in the economy which allows firms in the industry to increase their scale

Question 16

key elements of internal economies of scale?

Answer 16

-expansion of the firm itself
-lowers LR average cost
-efficiencies from larger scales of production
-range of economies

Question 17

key elements of external economies of scale?

Answer 17

-expansion of the industry
-benefits most/ all firms
-agglomeration economies are increasingly important
-helps to explain the rapid growth of many cities

Question 18

economies of scale within businesses?

Answer 18

lower costs represent an improvement in productive efficiency and can feed through to consumers in lower prices, economies of scale give a business a competitive advantage in the marketplace, lower prices and higher profit

Question 19

what’s an example of technical economies of scales?

Answer 19

large scale businesses can afford to invest in expensive and specialist capital machinery

Question 20

what’s an example of commercial economies of scale?

Answer 20

where firms take advantage of bulk discounts and bargaining power

Question 21

what’s an example of financial economies of scale?

Answer 21

enable more favourable rates of borrowing for more trustworthy businesses

Question 22

what’s an example of managerial economies of scale?

Answer 22

occur when large firms can afford specialist, effectively manage particular areas of the company

Question 23

what’s an example of risk bearing economies of scale?

Answer 23

often derived by large firms who can bear business risks more effectively than others

Question 24

when do diseconomies of scale occur?

Answer 24

when a business grows so large hat the costs per unit increase, generally occur as a result of the difficulties of managing a larger workforce

Question 25

what are reasons for diseconomies of scales?

Answer 25

poor communication, lack of motivation,loss of direction and coordination

Question 26

how is poor communication a reason for diseconomies of scale?

Answer 26

business expands communicating between different departments and along the chain of command becomes more difficult, layers in hierarchy distort message and workers have less clear instructions, less feedback and therefore less effective communication

Question 27

how is lack of motivation a reason for diseconomies of scale?

Answer 27

workers can often feel more isolated and less appreciated in a larger business, loyalty and motivation diminish, harder for managers to stay in contact with workers, falling productivity levels and increase in average labour costs per unit

Question 28

how is loss of direction and coordination a reason for diseconomies of scale?

Answer 28

harder to ensure that all workers are working for the same goal, more difficult for managers to supervise their subordinates, manager may be forced to delegate more tasks

Question 29

what are normal profits?

Answer 29

amount of profits required to keep factors of production in their current use, no incentive to leave or join industry, firms must be earning normal profits

Question 30

what are supernormal profits?

Answer 30

any profit that is above normal profit, has the effects of attracting new entrants into the market

Question 31

what are the roles of barriers to entry relating to normal profits?

Answer 31

significant barriers to entry, possible for firms to earn supernormal profits in the long run

Question 32

what are the roles of barriers to entry relating to supernormal profits?

Answer 32

no barriers to entry, supernormal profits will attract new firms to join the industry

Question 33

what does shut-down point mean?

Answer 33

when the business flips from being viable to not viable

Question 34

what conditions in the long run would a firm reach shut-down point?

Answer 34

if there are no longer any fixed costs, so if AR> AC, better off