3.3 Revenue, Costs And Profits Flashcards

1
Q

What is revenue

A

Revenue is the money earned from the sale of goods and services

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2
Q

What is total revenue

A

The total amount of money coming into the business through the sale of goods and services. Quantity x Price

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3
Q

What is average revenue

A

Demand is equal to AR: total revenue
——————
Output

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4
Q

What is marginal revenue

A

The extra revenue that the firms earns from selling one more unit of production.

Change in total revenue
———————————
Change in output

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5
Q

What is opportunity costs of production

A

The value that could have been generated had the resources been employed in their next best use

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6
Q

What are total costs

A

The cost of producing a given level of output: fixed + variable costs

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7
Q

What are total fixed costs

A

Costs that do not change with output and remain constant , rent, machinery

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8
Q

What are total variable costs

A

Costs that change directly with output
For example, materials

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9
Q

What are average costs

A

Total costs
—————
Output

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10
Q

What are average fixed costs

A

Total fixed costs
———————
Outout

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11
Q

What are average variable costs

A

Total variable cost
—————————
Output

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12
Q

What is marginal cost

A

The extra cost of producing one extra unit of a good

Change in total cost
——————————
Change in output

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13
Q

explain diminishing marginal productivity

A

If a factory needs more workers, they can be added quite easily and this will see an increase in production as machinery is used more rickety

However, it will take a long time for the factory to expand and adding more labour will mean that they will have less and less impact on the amount produced as they get in the way and have no machines to use

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14
Q

Diminishing marginal productivity’s effect of factors of production

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

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15
Q

The relationship between short run and long run cost curves

A

SRAC curves are U-shaped because if the law of diminishing returns whilst LRAC curves are U-shaped because of economies and diseconomies of scale

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16
Q

What does the long run average cost curve represent

A

The LRAC curve is a boundary representing the minimum level of average costs attainable at any given level of output. Points below the LRAC curve unattainable and producing above the LRAC is inefficient

17
Q

What causes a move along the LRAC

A

Movement along the LRAC is due to a change in output which changes the average costs of production due to internal economies/diseconomies of scale. A shift can occur due to external economies/diseconomies too.

18
Q

What are economies of scale

A

Economies of scale are the advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business.

19
Q

Results of economies of scale

A

As a result, the firm is able to experience increasing returns to scale where an increase in inputs by a certain percentage will lead to a greater percentage in output

20
Q

What are diseconomies of scale

A

The disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise. The firms experiences decreasing returns to scale, where output increases by a small percentage than inputs

21
Q

What are constant returns to scale

A

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

22
Q

What is the minimum efficient scale

A

The minimum level of output needed for a business to fully exploit economies of scale. It is the point where the LRAC curve first levels off when constant returns to scale is first met

23
Q

What’s internal economies of scale

A

an internal economy of scale is an advantage that a firm is able to enjoy because if a growth in the firm, independent of anything happening to other firms or the industry in general

24
Q

What are technical economies of scale

A

These occur when a firm can produce goods or services more efficiently as it increases its scale of production.
Factors such as specialisation of labour, better utilisation of machinery, and improved production processes can lead to technical economies of scale

25
Q

What are financial economies of scale

A

Large firms have greater security because they have more assets and are therefore less likely to be forced out of business overnight.
As a result, it is easier for them to obtain finance and interest rates will be lower due to lower risk. This makes investment more accessible

26
Q

What are risk-bearing economies

A

Large companies are able to operate in many markets, producing different products. Therefore, if one thing fails, the business won’t go bust

27
Q

What are managerial economies

A

Large companies can afford to appoint specialist managers in every fields Whi have specialist knowledge in that field.

28
Q

What are marketing and purchasing economies

A

Buying in bulk -
Specialisation
Distribution - may get preferential treatment by logistic companies etc

29
Q

What is an external economy of scale

A

An advantage that arises from the growth of the industry within which fhe firm operates, independent to the firm itself.

30
Q

Examples of external economies

A

In Silicon Valley, those looking for work in that industry will go to Silicon Valley for it.

31
Q

What is workers diseconomies

A

In large businesses, people can think their efforts go unnoticed and have less chance of promotion so lose motivation and work less hard

32
Q

How is geography a diseconomy of scale

A

A firm may have to transport finished products huge distances and firms may find it harder to control parts of the businesses which is miles away

33
Q

Management diseconomies of scale

A

As the business grows, it will become progressively more difficult to coordinate and keep control of all the different parts of the business. Coordination of a multinational company producing different parts of a car around the world is much more difficult than coordinating and controlling the work than a local garage

Communication can be slow and also can lose accuracy because of the distance and the number of people it has to be passed through

34
Q

What is profit

A

Profit is the difference between revenue and costs

35
Q

When does profit maximisation occur

A

When TR and TC are the furthest apart with TR above TC

when MC=MR

36
Q

What is normal profit

A

Normal profit is the return that is sufficient to keep the fectors of production committed to the business.

Enough to keep the firm in the market

37
Q

What is supernormal profit

A

If the profit is greater than normal profit

38
Q

Why is it not necessarily the best decision to shut down if a business is making a loss

A

•It depends if the average variable cost.
• if AVC<AC then the firm should continue production. Each good they make will generate more revenue than it cost for them to make, therefore, this will eventually turn into profit

• if AVC>AC, they should leave immediately