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Economics > 3.3 revenues costs and profits > Flashcards

3.3 revenues costs and profits Flashcards

1
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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2
Q

what is average revenue?

A

demand is equal to AR. it equal to the total revenue divided by the total output

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3
Q

what is marginal revenue?

A

the extra revenue that a firm earns from selling one more unit of production. equal to the change in revenue/change in output

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4
Q

what is a perfectly elastic AR curve show?

A

perfect competition, the firms have no price setting power. it shows the marginal revenue is equal to the average revenue

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5
Q

what occurs to the total revenue along the perfectly elastic AR curve ?

A

the total revenue increases by a constant rate as the price remains the same but the quantity is increasing.

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6
Q

what is the relationship between the AR curve and the MR curve in usual circumstances?

A

the MR curve is twice as steep as the AR curve

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7
Q

when is the profit maximization point?

A

MR=MC

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8
Q

what is the revenue maximization point?

A

MR=0

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9
Q

what is the shape of the AR curve in imperfect competition?

A

the AR curve is downward sloping

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10
Q

what occurs to total revenue when the MR curve is positive?

A

an increase in the output will cause an increase in the total revenue

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11
Q

what is the effect of the total revenue when the MR curve is negative?

A

an increase in the output will cause a decrease in the total revenue

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12
Q

what is the shape of the TR curve across a revenue-output graph?

A

the curve is an inverse U

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13
Q

what is the total cost?

A

the cost of producing a given level of output, the sum of the total variable costs and the total fixed cost

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14
Q

what is the variable costs?

A

costs that change directly with output

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15
Q

what are fixed costs?

A

costs that do not change with output but remain constant

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16
Q

what are average fixed costs?

A

total fixed cost/output

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17
Q

what are average variable costs?

A

total variable costs/output

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18
Q

what is the marginal cost?

A

the extra cost of producing an additional unit of a good`. change in total cost/ change in output

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19
Q

what is the short run?

A

the short run is the timeframe in which one factor of production is fixed

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20
Q

what is the long run?

A

the time when all factors of production become variable

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21
Q

what is the point of allocative efficency?

A

P=MC

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22
Q

what is the point of productive efficency?

A

MC=AC

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23
Q

where does the mc curve intersect the AC curve?

A

the MC curve intersects the AC curve at the lowest point

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24
Q

what is the shape of the short run average cost curve?

A

it is U shaped due to the law of diminishing returns

25
Q

what is the shape of the long run average cost curve and why?

A

it is U shaped due to economies and diseconomies of scale

26
Q

how can u show the long run cost curve against the short run average cost curve?

A

the LR AC curve is an envelope of SR AC curve as with it always touching the bottom of the SR AC curve. this is due to the fact, as capital is fixed in the SR to increase output the firm must increase costs. however in the long run, capital is variable so to increase output it can vary capital and benefit from economies of scale which lowers cost

27
Q

what causes a movement along the long run average cost curve?

A

a change in output

28
Q

what causes a shift in the long run aggregate cost curve?

A

external economies or diseconomies of scale, taxes or technology, which affects cost of production

29
Q

what are economies of scale?

A

the advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business. as a result it experiences increasing returns to scale

30
Q

what are returns to scale?

A

the quantitively change in output compared to a quantitively change in input.

31
Q

what are increasing returns to scale?

A

increasing returns to scale are when the percentage change in outputs is greater then the percentage change in inputs

32
Q

what are constant returns scale?

A

when an increase in inputs get the same percentage increase in outputs

33
Q

what is the minimum efficient scale?

A

the minimum level of output needed for a business to fully exploit economies of scale. point where curve first levels off.

34
Q

what is an internal economy of scale?

A

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

35
Q

what are the different types of economies of scale?

A

specialisation, balance teams of machines, increased dimensions, indivisibility of capital, research and development

36
Q

why is specialisation cause economies of scale?

A

larger firms will be able to hire specialised workers and machinery which will be able to do their jobs more quickly and at a higher quality then those that aren’t specialised

37
Q

how does a balanced teams of machines cause economies of scale?

A

large firms can afford to buy machines for each stage of production. by combining these machines, they can ensure each is producing at the optimal level. smaller firms may only be able to afford one machine

38
Q

how does increased dimensions affect the economies of scale?

A

if you increase the size of a container by double you can transport more than double. if you double the length of the fences, then the sheep pen area will be more than doubled.

39
Q

how does the indivisibility of capital affect the economies of scale?

A

some processes require huge amounts of capital that can only be produced on a large scale for example a power plant.

40
Q

how does research and development affect the economies of scale?

A

often it is only the large firms who can afford to carry out large scale research and development, which means they are able to gain a large advantage over their competitors

41
Q

what are financial economies of scale?

A

large firms have greater security due to the fact they have more assets so are less likely to be forced out of business over night. as a result it is easier for them to obtain finance due to their lower risk

42
Q

what are risk bearing economies of scale?

A

large companies can operate in various industry’s. this means they are diversified so are less vulnerable to risks

43
Q

what are managerial economies of scale?

A

large firms can afford to purchase specialized managers. these have a greater knowledge and create a larger increase in productivity

44
Q

how does buying in bulk cause an economies of scale?

A

large firms will buy a greater number of raw resources in bulk, so as a result they can get them at lower costs compared to other firms

45
Q

how does the distribution cause an economies of scale?

A

large firms will be able to get lower transportation costs as they are providing the delivery companies with a lot of business so may get discounted rate. also they can be transported in larger vehicles which results in a cheaper per unit cost

46
Q

what are external economies of scale?

A

an external economy of scale is an advantage that arises from the growth of the industry which the firm operates in, independent to the firm itself. these cause LRAC to shift downwards

47
Q

why is labour an external economy of scale?

A

a firm may be able to benefit from labour coming into the area to join an industry with other succesful firms, for example silicon valley and technology. also the education and training another firm provides it workers will reduce cost for your training

48
Q

how does support services create external economies of scale?

A

if firms that support large industrys move to the local are to get business of larger firms, this will make it cheaper for you to benefit from that labour

49
Q

how do workers in large firms cause diseconomies of scale?

A

in a large business, workers can feel that their work goes unnoticed and that they have less chance of being promoted so they lose motivation and become less productive.

50
Q

how does the geography cause diseconomies of scale?

A

firms may find it harder to transport good further away and also harder to communicate with other parts of the company if they are spread over different places

51
Q

how does the rate of change cause diseconomies of scale?

A

it takes much longer for large firms to undergo and respond to change

52
Q

how does the resources cause diseconomies of scale?

A

although the firm can benefit from buying materials in bulk. it also means that they increase the demand for goods which will increase the price

53
Q

how does the management create diseconomies of scale?

A

it becomes harder to manage when their is a larger amount of workers. this means managers may not notice when workers are slacking off. it also is harder to coordinate for example it is harder to organise a car factory that is spread across the world then for a local car garage. also the speed of communication will be lower as it takes longer to climb up the management ladder. this makes firms slower to react

54
Q

what are normal profits?

A

when the average revenue is equal to the average costs

55
Q

what are supernormal profits?

A

when the average revenue is greater than the average costs

56
Q

what are subnormal profits?

A

when the average costs are greater than the average revenue

57
Q

what is the shut down price for a firm in the short run?

A

the shut down price in the short run is when AR=AVC as anything above this point atleast they are paying off some of the fixed costs

58
Q

what is the shut down price for a firm in the long run?

A

in the long run a firm needs to make at least normal profits in order to survive so AR=AC

Economics (19 decks)

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