3.3 - Revenues, Costs and Profits

Question 1

What are the 3 types of revenue?

Answer 1

• Total Revenue (TR)
  (Qty x Price)
• Average Revenue (AR)
  (TR/ Output)
• Marginal Revenue (MR)
  (Change in TR/ Change in output)

Question 2

What are 7 types of costs?

Answer 2

• Total Cost (TC)
• Total Fixed Cost (TFC)
• Total Variable Cost (TVC)
• Average (total) Cost (ATC)
• Average Fixed Cost (AFC)
• Average Variable Cost (AVC)
• Marginal Cost (MC)

Question 3

What is short run?

Answer 3

At least one factor of production is fixed

Question 4

What is diminishing marginal productivity?

Answer 4

At a certain point, employing an additional factor of production causes a relatively smaller increase in output
(e.g. workers in a coffee shop getting in the way of each other, making production go slower)
(only occurs in short run because in the LR, all factors are variable)

Question 5

What is the relationship between short-run and long-run cost curves?

Answer 5

• SRAC curves are U-shaped because of law of diminishing return
• Whilst LRAC curves are U-shaped because of Eos and DEoS

Question 6

What is Economies of scale?

Answer 6

Advantages of large scale production
(allowing large firms to produce at a lower AC that smaller firms)

Question 7

What is increasing returns to scale?

Answer 7

Where an increase in inputs by a certain percentage leads to a greater percentage in output

Question 8

What is constant returns to scale?

Answer 8

Where firms increase inputs and receive and increase in input by the same percentage

Question 9

What is the minimum efficient scale?

Answer 9

Minimum level of output needed for a business to full exploit EoS.

Question 10

What is internal Economies of scale?
What are the 5 types?

Answer 10

An advantage that firms benefit from because of growth in the firm (independent of anything happening outside the firm)

• Technical
• Financial
• Risk Bearing
• Managerial
• Marketing and Purchasing

Question 11

What are technical economies?

Answer 11

A type of economy of scale that is achieved via technology

Question 12

What are the 5 causes for technical economies?

Answer 12

• Specialisation (e.g. specialist machines)
• Balanced team of machines
• Increased dimensions (e.g. doubling size of building without doubling cost)
• Indivisibility of Capital (big machinery needed for big production)
• Research and Development

Question 13

What are Financial Economies?

Answer 13

Larger firms that have greater security due to having many assets (therefore less likely to go out of business overnight)
- Easier to obtain finance and lower interest rates due to lower risk (makes investment more accessible)

Question 14

What are Risk Bearing Economies?

Answer 14

Large companies are able to operate in a range of different markets, producing different products, meaning if one area of business fails, the rest can still survive.

Question 15

What are managerial Economies?

Answer 15

Large Companies can afford specialist managers in every field, who are specialised and knowledgeable

Question 16

What are the 3 features of Marketing and Purchasing Economies?

Answer 16

• Buying in Bulk
• Specialisation
• Distribution (e.g. cheaper rates from transport companies)

Question 17

What is external Economies of scale?

Answer 17

An advantage from the growth of the industry that the firm operated within (independent from the firm itself)

Question 18

What are 2 features of external economies of scale?

Answer 18

• Labour
• Support Service
  (Businesses who provide products to the firms based in a particular area will move there, to reduce cost/time)