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Economics > 3.3 - Revenue, costs and profits > Flashcards

3.3 - Revenue, costs and profits Flashcards

1
Q

What is marginal revenue?
What is the formula for MR?

A
  • The extra revenue that the firm earns from selling one more unit of production
  • change in TR/ change in Q
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2
Q

What is average revenue?
What is the formula for AR?

A
  • Shows how much revenue there is per unit of output
  • TR/output
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3
Q

What is total revenue?
What is the formula for TR?

A
  • The total amount of money coming into the business through sale of goods and services
  • no. of units sold x cost per unit
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4
Q

What is the relationship between PED and MR?

A
  • As price falls, elasticity changes from elastic to unitary elastic (midpoint) to inelastic - as Q falls, demand becomes more elastic
  • When MR is positive, PED is elastic
  • When MR is negative, PED is inelastic
  • When MR is 0, PED = unitary elastic
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5
Q

What is marginal cost?
What is the formula for MC?

A
  • The extra cost of producing one extra unit of a good
  • Change in TC/ Change in Q
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6
Q

What is a fixed cost?
Give an example.

A
  • Costs that don’t change with output and remain constant
  • E.g. rent, machinery, salaries
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7
Q

What is a variable cost?
Give an example.

A
  • Costs that change directly with output
  • E.g. raw materials, electricity bills
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8
Q

What is total cost?
What is the formula for TC?

A
  • The cost of producing a given level of output
  • Fixed + variable costs
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9
Q

What is average cost?
What is the formula for AC?

A
  • Cost per unit of output
  • TC / Q
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10
Q

What is a perfectly elastic demand curve and how does this relate to revenue?

A
  • These firms are in perfect competition - have no price-setting power, and it’s constant (MR=D=AR=P)
  • TR curve is upward sloping - prices are constant -> more goods sold = more revenue
  • Firms in imperfect competition have a downward sloping demand curve - price setting power
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11
Q

What is diminishing marginal productivity?

A
  • If a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit
  • Marginal output decreases as more inputs are added in the SR - marginal COP rises
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12
Q

What is diminishing marginal returns? When does it occur?

A
  • Increased specialisation occurs as a firm grows in size -> productivity increases -> MC falls
  • Additional labour beyond this point -> productivity falls -> fixed resources e.g. kitchen space, ovens
  • Decreasing productivity is known as diminishing marginal returns
  • Occurs only in the short-run - at least one FOP is fixed
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13
Q

Why is AC U-shaped?

A
  • Due to the law of diminishing marginal returns (or productivity)
  • Costs initially fall as machinery is used more efficiently, but as production continues to expand, efficiency falls as machinery is overused
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14
Q

Why is MC U-shaped?

A
  • Due to the law of diminishing marginal returns
  • It will iniatlly fall as machines are used more efficiently but will rise as production continues to rise
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15
Q

Why will the MC curve always cut the AC curve at its lowest point?

A
  • If MC is below AC then AC will continue to fall since producing one more costs less than the average so the average falls
  • If MC is above AC, then AC will rise
  • Marginal costs can be rising while AC is still falling, as long as MC is still below MC
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16
Q

What is the relationship between the MC and AVC curve?

A
  • When MC is below (MC<AVC) - MC drags AVC down because the cost of producing the next unit is lower than the average
  • When MC is above (MC>AVC) - MC pulls AVC up and AVC starts to increase
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17
Q

What is the relationship between short-run and long-run cost curves?

A
  • SRAC curves are u-shaped due to diminishing marginal returns
  • LRAC curves are u-shaped due to economies and diseconomies of scale
18
Q

Describe the LRAC and SRAC curves diagram?

A
  • LRAC is an envelope to SRAC as it’s either equal to or below the relevant SRAC
  • A firm may initially be set to produce a certain amount a day + have enough machinery to do so effectively
  • They could become popular and need to produce more- in the SR SRAC increases due to diminishing marginal returns (fixed resources)
  • In the LR (variable factors) SRAC shifts lower -> economies of scale and eventually constant returns to scale then diseconomies
19
Q

What causes a movement along the LRAC and what causes a shift along the LRAC curve?

A
  • Movement: due to a change in output - changes average COP due to internal economies/diseconomies of scale
  • Shift: due to external economies/diseconomies, taxes, or technology - affects COP for a given level of output
20
Q

What is economies of scale?

A

Occurs when an increase in the scale of output results in a lower cost per unit -> generates efficiencies that lower AC

21
Q

What is diseconomies of scale?

A

Occurs when an increase in the scale of output results in a higher cost per unit

22
Q

What is constant returns to scale?

A

Where firms increase inputs and receive an increase in output by the same percentage

23
Q

What is the minimum efficient scale?

A
  • The minimum level of output needed for a business to fully exploit economies of scale
  • The point where the LRAC curve first levels off and when constant returns to scale is first met
24
Q

What is an internal economy of scale?

A

Occur as a result of the growth in the scale of production within the firm

25
Q

What are the different types of internal economies of scale?

A

Many Prime Ministers Read Financial Times
- Managerial
- Risk-bearing
- Purchasing
- Marketing
- Financial
- Technological

26
Q

What are managerial economies of scale?

A
  • Large firms can appoint specialist managers in every field - greater knowledge + able to do their job better
  • Staff represent an indivisibility - small firms cant employ specialist staff
27
Q

What are purchasing economies of scale?

A
  • When large firms buy raw materials in greater volumes and receive a bulk purchase discount - lowers AC
28
Q

What are marketing economies of scale?

A
  • Larger firms spread the cost of advertising over a large number of sales - reduces AC
  • Can also reuse marketing materials in different geographic regions - lowers AC
29
Q

What is risk-bearing economies of scale?

A
  • Occurs when a firm is able to spread the risk of failure by increasing its number of products e.g. greater product diversification - less failure lowers AC
30
Q

What is financial economies of scale?

A
  • Large firms often receive lower interest rates on loans than smaller firms - perceived as less risky -> cheaper loan lowers AC
31
Q

What is technological economies of scale?

A
  • Occurs as a firm can use its machinery at a higher level of capacity due to increased output -> spreads the cost of machinery over more units + invest in specialist capital -> lowers AC
  • E.g. Spread Lettuce Farm in Japan - output is 50,000 a day -> run by robots monitoring, sunlight, watering plants etc
32
Q

What is an external economy of scale and what are the different types?

A
  • Occurs when there is an increase in the size of the industry in which the firm operates - benefits from lower AC generated by factors outside of the firm

Types:
- Knowledge transfers - when an industry expands, knowledge is transferred between firms - helps firms learn effective new production techniques -> LRAC falls - E.g. In LA’s film industry, the green screen technique was spread by knowledge transfer
- Recruitment costs - when an industry expands, lots of specialist workers will move to that area to find work -> easier to recruit workers -> lower recruitment costs -> LRAC falls - E.g. 60,000+ coders in Silicon Valley -> tech firms’ recruitment costs fall
- Transport links
- Geographic cluster
- Skilled labour
- Favourable legislation

33
Q

How do geographic clusters lead to external economies of scale?

A
  • As an industry grows, ancillary firms move closer to major manufacturers to cut costs & generate more business - lowers AC
  • E.g. car manufacturers in Sunderland rely on 2500+ ancillary firms
34
Q

How do transport links lead to external economies of scale?

A
  • Improved transport links develop around growing industries in order to help get people to work & to improve transport logistics -> lower AC
  • E.g. Bangalore (India’s Silicon Valley) - transport projects have been successful in transforming the movement of people & goods
35
Q

How does skilled labour lead to external economies of scale?

A
  • An increase in skilled labour can lower the cost of skilled labour -> lowering the AC
  • The larger the geographic cluster, the larger the skilled pool of labour
36
Q

How does favourable legislation lead to external economies of scale?

A
  • Often generates significant reductions in AC as governments support certain industries in order to achieve their wider objectives
37
Q

What are the causes of diseconomies of scale?

A
  • Management: where managers work more in their own interest - lowers efficiency
  • Communication: when a firm with multiple layers of management or geographic locations can’t communicate quickly & efficient
  • Geographical: when a firm has widespread bases of operations -> logistical & communication challenges
  • Cultural: when a firm expands into foreign markets where workers may have different cultural work norms
38
Q

What are the 3 main reasons for internal diseconomies of scale?

A
  • Alienation: workers feel isolated from co-workers (cubicles in office spaces) -> productivity falls -> LRAC rises
  • Bureaucracy: more managers = more forms needed to track work etc (admin is $21bn of NHS budget) -> LRAC rises
  • Communication -> slows down -> productivity falls -> LRAC rises
39
Q

What is the disctinction between normal and supernormal profit?

A
  • Normal profit: breakeven, TR=TC
  • Supernormal profit: TR>TC
40
Q

What are short-run shut down points?

A
  • In the SR, if the selling price is higher than AVC, the firm should keep producing (AR>AVC)
  • If the selling price (AR) falls to the AVC it should shut down (AR<AVC)
41
Q

What are long-run shut down points?

A
  • In the LR, ATC=AVC
  • LR shutdown - AR=ATC
  • If AR>ATC -> profit is made on each unit -> stay in the market
  • If the selling price (AR) is equal to or lower than ATC, the firm should shut down (AR<ATC)

Economics (32 decks)

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