3.3 Revenue, Costs And Profits Flashcards
What is revenue
Revenue is the money earned from the sale of goods and services
What is total revenue
The total amount of money coming into the business through the sale of goods and services. Quantity x Price
What is average revenue
Demand is equal to AR: total revenue
——————
Output
What is marginal revenue
The extra revenue that the firms earns from selling one more unit of production.
Change in total revenue
———————————
Change in output
What is opportunity costs of production
The value that could have been generated had the resources been employed in their next best use
What are total costs
The cost of producing a given level of output: fixed + variable costs
What are total fixed costs
Costs that do not change with output and remain constant , rent, machinery
What are total variable costs
Costs that change directly with output
For example, materials
What are average costs
Total costs
—————
Output
What are average fixed costs
Total fixed costs
———————
Outout
What are average variable costs
Total variable cost
—————————
Output
What is marginal cost
The extra cost of producing one extra unit of a good
Change in total cost
——————————
Change in output
explain diminishing marginal productivity
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
Diminishing marginal productivity’s effect of factors of production
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
The relationship between short run and long run cost curves
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
What does the long run average cost curve represent
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
What causes a move along the LRAC
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.
What are economies of scale
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.
Results of economies of scale
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
What are diseconomies of scale
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
What are constant returns to scale
Where firms increase inputs and receive an increase in output by the same percentage
What is the minimum efficient scale
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
What’s internal economies of scale
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
What are technical economies of scale
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
What are financial economies of scale
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
What are risk-bearing economies
Large companies are able to operate in many markets, producing different products. Therefore, if one thing fails, the business won’t go bust
What are managerial economies
Large companies can afford to appoint specialist managers in every fields Whi have specialist knowledge in that field.
What are marketing and purchasing economies
Buying in bulk -
Specialisation
Distribution - may get preferential treatment by logistic companies etc
What is an external economy of scale
An advantage that arises from the growth of the industry within which fhe firm operates, independent to the firm itself.
Examples of external economies
In Silicon Valley, those looking for work in that industry will go to Silicon Valley for it.
What is workers diseconomies
In large businesses, people can think their efforts go unnoticed and have less chance of promotion so lose motivation and work less hard
How is geography a diseconomy of scale
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
Management diseconomies of scale
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
What is profit
Profit is the difference between revenue and costs
When does profit maximisation occur
When TR and TC are the furthest apart with TR above TC
when MC=MR
What is normal profit
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
What is supernormal profit
If the profit is greater than normal profit
Why is it not necessarily the best decision to shut down if a business is making a loss
•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