3.3 - Revenues, Costs and Profits Flashcards
Define revenue.
Revenue is the income generated from sales of a good or service.
Give the formula for total revenue.
Total revenue = Price x Quantity
What is average revenue?
Average revenue is the income generated per unit of output.
Give the formula for average revenue.
AR = Total Revenue / Quantity, or Price x Quantity / Quantity = Price
Why is the demand curve equal to average revenue?
The demand curve is equal to average revenue because average revenue equals price, hence the AR curve is also the demand curve.
What is marginal revenue?
Marginal revenue is the increase in total revenue from selling an extra unit of good or service.
Give the formula for marginal revenue.
MR = Change in total revenue / Change in output
What are fixed costs?
Fixed costs are costs than don’t directly vary with output. These costs are known as overheads.
Define variable costs.
Variable costs are costs which vary directly with output.
Give the formula for total costs.
Total Costs = fixed costs + variable costs.
Define average fixed costs.
Average fixed costs are fixed costs per unit of output.
Define average variable costs.
Average variable costs are the variable costs per unit of output.
Give the formula for average fixed costs.
AFC = Fixed Costs / Output
Give the formula for average variable costs.
AVC = Variable Costs / Output
What are average total costs?
Average total costs are the total costs per unit of output.
Give the formula for average total costs.
ATC = Total Costs / Output, or AVC + AFC
What are marginal costs?
Marginal costs are the increase in total costs caused by an additional unit of output.
What is the Law of Diminishing Returns?
The law of diminishing returns is a law in the short term, where if the variable factor of production is increased while other factors stay fixed, then marginal product will fall. So there will be smaller increases in output.
Define economies of scale.
Economies of scale are the cost advantages to a firm for production on a larger scale.
What are the two types of economies of scale?
- Internal economies of scale
- External economies of scale
Give an example of internal economies of scale.
- Better decision making (managerial)
Give another example of internal economies of scale.
- Negotiation of discounts to suppliers (purchasing and marketing)
Give a third example of internal economies of scale.
Financial - If a firm is well recognised or doing very well economically, then it may negotiate low rates of interest when borrowing money. As the firm is doing well, banks will trust the firm and view it as low risk. Although costs rise, the costs being spread over the much larger output can help decrease costs and increase productivity.
What are external economies of scale?
These are economies of scale that involve changes outside a firm, but still within the industry of that specific firm. This means multiple firms within one industry are impacted.
Give an example of external economies of scale.
Better transport infrastructure - This is where stronger transport facilities can help firms access raw materials or components to help produce goods. Therefore total costs decrease.
Give another example of external economies of scale.
R&D firms - Research and development firms may move closer to your business and if this happens, then it may positively influence capital technology. This can help increase productivity and keep total costs down.
What are diseconomies of scale?
Diseconomies of scale arise when a firm has too much growth to the point where its productivity falls and total costs increase faster than the rise in output.
Give the three types of profit.
- Normal profit
- Supernormal/Abnormal profit
- Subnormal profit
What is normal profit?
Normal profit is the minimum level of profit required to keep a factor of production in their current use.
What is supernormal profit?
Supernormal (abnormal profit) is the level of profit earned above normal profit. This is where average revenue > average cost
Define subnormal profit.
Subnormal profit occurs when a loss is made, it is negative profit. This is where average costs > average revenue, prompting a firm to switch goods to get a higher profit.
