3.3 - Revenues, Costs and Profits

Question 1

Define revenue.

Answer 1

Revenue is the income generated from sales of a good or service.

Question 2

Give the formula for total revenue.

Answer 2

Total revenue = Price x Quantity

Question 3

What is average revenue?

Answer 3

Average revenue is the income generated per unit of output.

Question 4

Give the formula for average revenue.

Answer 4

AR = Total Revenue / Quantity, or Price x Quantity / Quantity = Price

Question 5

Why is the demand curve equal to average revenue?

Answer 5

The demand curve is equal to average revenue because average revenue equals price, hence the AR curve is also the demand curve.

Question 6

What is marginal revenue?

Answer 6

Marginal revenue is the increase in total revenue from selling an extra unit of good or service.

Question 7

Give the formula for marginal revenue.

Answer 7

MR = Change in total revenue / Change in output

Question 8

What are fixed costs?

Answer 8

Fixed costs are costs than don’t directly vary with output. These costs are known as overheads.

Question 9

Define variable costs.

Answer 9

Variable costs are costs which vary directly with output.

Question 10

Give the formula for total costs.

Answer 10

Total Costs = fixed costs + variable costs.

Question 11

Define average fixed costs.

Answer 11

Average fixed costs are fixed costs per unit of output.

Question 12

Define average variable costs.

Answer 12

Average variable costs are the variable costs per unit of output.

Question 13

Give the formula for average fixed costs.

Answer 13

AFC = Fixed Costs / Output

Question 14

Give the formula for average variable costs.

Answer 14

AVC = Variable Costs / Output

Question 15

What are average total costs?

Answer 15

Average total costs are the total costs per unit of output.

Question 16

Give the formula for average total costs.

Answer 16

ATC = Total Costs / Output, or AVC + AFC

Question 17

What are marginal costs?

Answer 17

Marginal costs are the increase in total costs caused by an additional unit of output.

Question 18

What is the Law of Diminishing Returns?

Answer 18

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.

Question 19

Define economies of scale.

Answer 19

Economies of scale are the cost advantages to a firm for production on a larger scale.

Question 20

What are the two types of economies of scale?

Answer 20

• Internal economies of scale

- External economies of scale

Question 21

Give an example of internal economies of scale.

Answer 21

• Better decision making (managerial)

Question 22

Give another example of internal economies of scale.

Answer 22

• Negotiation of discounts to suppliers (purchasing and marketing)

Question 23

Give a third example of internal economies of scale.

Answer 23

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.

Question 24

What are external economies of scale?

Answer 24

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.

Question 25

Give an example of external economies of scale.

Answer 25

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.

Question 26

Give another example of external economies of scale.

Answer 26

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.

Question 27

What are diseconomies of scale?

Answer 27

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.

Question 28

Give the three types of profit.

Answer 28

• Normal profit
• Supernormal/Abnormal profit
• Subnormal profit

Question 29

What is normal profit?

Answer 29

Normal profit is the minimum level of profit required to keep a factor of production in their current use.

Question 30

What is supernormal profit?

Answer 30

Supernormal (abnormal profit) is the level of profit earned above normal profit. This is where average revenue > average cost

Question 31

Define subnormal profit.

Answer 31

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.