3.3 Revenue, Costs and Profits

Question 1

What is total revenue & formula?

Answer 1

Total revenue is the total value of sales a firm incurs.
TR = PxQ

Question 2

What is average revenue?

Answer 2

Average revenue is the overall revenue per unit.
AR = TR/Q

Question 3

What is marginal revenue or formula?

Answer 3

Marginal revenue is the extra revenue received from the sale of an additional output.
MR = ΔTR/ΔQ

Question 4

What is the relationship between TR, AR & MR in perf comp?

Answer 4

Firms are price takers; price is constant
Marginal revenue is same for all extra unit
MR=AR=D
TR curve upwards sloping as prices are constant; more good sold, higher revenue

Question 5

How does the costs/revenue graph of a firm in imperfect competition look like?

Answer 5

AR/MR is downwards sloping
- Price decreases as output increases
MR=0 halfway through AR
- MR falls twice as much as AR
TR is a u-shape
- TR is initially increasing; once MR=0; TR starts falling

Question 6

What is fixed costs?

Answer 6

Costs that do not change as the level of output changes.

Question 7

What is variable costs?

Answer 7

Variable costs are costs that vary directly with output.

Question 8

What is marginal costs?

Answer 8

Marginal cost is the cost of producing an additional unit of output.

Question 9

Formula for
- Total variable cost
- Average total costs
- Average fixed costs
- Average variable costs
- Marginal costs

Answer 9

Total variable cost
- variable cost x quantity
Average total costs
- Total cost/quantity
Average fixed costs
- fixed costs/quantity
Average variable costs
- variable costs/quantity
Marginal costs
- ΔTC/ΔQ

Question 10

What is the Short/long-run?

Answer 10

Short run is when only one factor of production is variable e.g labour.
Long run is when all FoPs are variable.

Question 11

What is marginal product of labour?

Answer 11

Marginal product of labour is
- the change in output resulted from an additional unit of labour

Question 12

What is law of diminishing marginal productivity?

Answer 12

Law of diminishing marginal utility is when
- initially productivity increases as labour increases
- after certain point, additional labour decreases productivity due to constraints of other FoPs

Question 13

What is economies of scale?

Answer 13

EofS is when a firm decreases LRAC as output increases due to benefits it receives.

Question 14

What is increasing returns to scale?

Answer 14

Increasing returns to scale is when increase in input results in larger than proportional increase in output.

Question 15

What is diseconomies of scale?

Answer 15

DEofS is when a firm continues increasing its output in LR and it’s LRAC increases.

Question 16

What are the 6 types of Internal EofS?

Answer 16

• Risk-Bearing economies
• Financial Economies
• Managerial Economies
• Technical Economies
• Marketing Economies
• Purchasing Economies

Question 17

What is Risk-bearing economies EofS?

Answer 17

When large firms are able to operate in variety of markets; if one area of business fails, their firm won’t collapse

Question 18

What is financial economies EofS?

Answer 18

Large firms have greater assets/security; lower risk; can negotiate lower interest rates; cost increase but Q increase faster.

Question 19

What is managerial economies EofS?

Answer 19

Employ specialist manager; more efficient in certain tasks; lower AC

Managers in smaller firms have to fulfill multiple roles; decreases efficiency

Question 20

What is technical economies EofS?

Answer 20

Improvements in the production process
- Specialisation of workers
- Specialist machinery; larger firms able to buy machinery for each stage of production;
- Increased dimensions
- R&D; larger firms able to gain advantage over competitors.

Question 21

What is marketing economies EofS?

Answer 21

• Bulk-buy advertisement; negotiate better rate of unit advertising; cost spread over higher quantity

Question 22

What is purchasing economies EofS?

Answer 22

• Bulk-buying; firms buy raw materials in larger quantity; suppliers offer discount per unit; spread cost over wider range of output

Question 23

What are the 3 types of external EofS?

Answer 23

• Better transport infrastructure
• Component suppliers move closer
• R&D firms move closer

Question 24

How does better infrastructure result in EofS?

Answer 24

Larger firms attract better infrastructure around it; cheaper to access raw materials and transport; total cost decrease.

Question 25

What are 4 types of DEofS?

Answer 25

• Control
• Communication
• Coordination
• Motivation

Question 26

How can control cause DEofS?

Answer 26

Harder to control workforce of larger firm; workers may slack off; impact productivity; Q decrease.

Question 27

How can communication cause DEofS?

Answer 27

Harder to spread messages through larger firms; takes time; impact on productivity

Question 28

How can coordination cause DEofS?

Answer 28

Coordinating between different business parts gets difficult as firm gets larger; poorer quality work; productivity suffers

Question 29

How can de-motivation cause DEofS?

Answer 29

In large firms, workers may feel less value and they are easily replaced. Hits their motivation; work less efficient; worse quality; productivity decreases

Question 30

What is minimum efficient scale?

Answer 30

Minimum efficient scale is the lowest cost point on LRAC; level of output where EofS is fully exploited.

Question 31

What is constant scales to return?

Answer 31

Output increases but AC stays same.

Question 32

What are conditions for profit maximisation?

Answer 32

MC=MR

Question 33

What are the 3 different types of profit?

Answer 33

Normal profit
- a return which is sufficient to keep FoPs running.
Supernormal profit
- When profit is greater than normal profit
Subnormal Profit
- Loss where firm fails to cover costs

Question 34

What is the shutdown point in the LR?

Answer 34

AVC>AR; producing more goods will increase the loss

Question 35

Why do firms continue to produce at a loss if AVC<AR?

Answer 35

Each good they make will generate more revenue (AR) than it cost for them to make (AVC); continue of production covers some of the fixed costs

Question 36

What is the shutdown point for firms in the short run?

Answer 36

AVC=AR; should produce as long as revenue covers variable cost.