3.3 Revenues, Costs and Profits

Question 1

Total revenue

Answer 1

The total amount of money coming into the business through the sale of goods and services. quantity x price

Question 2

Average revenue

Answer 2

Demand is equal to AR:
total revenue
———————
output

Question 3

Marginal revenue

Answer 3

The extra revenue that the firm earns from selling one more unit of production: total revenue from ‘N’ goods- total revenue from (N-1) goods OR
change in total revenue
———————————–
change in output

Question 4

Perfectly elastic demand curve

Answer 4

these are firms in perfect competition, a concept looked at in the next unit.

Question 5

If marginal revenue is positive

Answer 5

when the firm sells the product at a lower price, total revenue still grows and so the demand curve is elastic. Up until output Q, the demand curve is elastic.

Question 6

If marginal revenue is negative

Answer 6

Total revenue decreases as price decreases (or output increases) and so the
demand curve is inelastic. After output Q, the demand curve is inelastic.

Question 7

When marginal revenue equals 0

Answer 7

TR is maximised and the demand curve is unitary elastic; this is at
point Q.

Question 8

Cost in the short run

Answer 8

One factor of production is fixed and cannot be changed

Question 9

Costs in the long run

Answer 9

all costs are variable

Question 10

Total cost

Answer 10

The cost of producing a given level of output: fixed + variable costs

Question 11

Total fixed cost

Answer 11

Costs that do not change with output and remain constant e.g. rent, machinery

Question 12

Total variable cost

Answer 12

Costs that change directly with output e.g. materials

Question 13

Average (total) cost

Answer 13

output

Question 14

Average fixed cost

Answer 14

   output

Question 15

Average variable cost

Answer 15

     output

Question 16

Marginal cost

Answer 16

The extra cost of producing one extra unit of a good: total cost of producing N goods - total cost of producing (N-1) goods
change in total cost
——————————-
change in output

Question 17

Law of diminshing marginal returns

Answer 17

If a factor of production is fixed, this will affect the business if it decides to expand. More workers can be added relatively easily and this will see an increase in production as machinery is used more efficiently. 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.

Question 18

Diminishing marginal productivity

Answer 18

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.

Question 19

The relationship between short-run and long-run cost curves:

Answer 19

Short run average cost (SRAC) curves are U-Shaped because of the law of diminishing
returns whilst long run average cost (LRAC) curves are U-Shaped because of economies and diseconomies of scale.

Question 20

Shifts and movement of the LRAC curve

Answer 20

• minimum level of average costs attainable at any given level of output.
• Change in output

Question 21

Economics of Scale

Answer 21

when average costs begin to fall

Question 22

Diseconomies of scale

Answer 22

when average cost begin to rise

Question 23

Constant returns

Answer 23

where firms increase inputs and receive an increase in output
by the same percentage.

Question 24

Minimum efficient scale

Answer 24

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 and when constant returns to scale is first met.

Question 25

Internal economies of scale

Answer 25

• technical economies
• financial economies
• risk bearing economies
• managerial economies
• purchasing economies

Question 26

examples of technical economies

Answer 26

• specialisation
• balanced teams of machines
• increased dimensions
• indivisibilty of capital
• research and development

Question 27

examples of marketing and purchasing economies

Answer 27

• buying in bulk
• specialisation
• distribution

Question 28

external economies of scale

Answer 28

• better universities
• road infrastructure
• communication networks
• highly skilled population

Question 29

Diseconomies of scale

Answer 29

• workers
• geography
• change
• price of materials
• management

Question 30

ways to solve diseconomies of scale

Answer 30

• enter into smaller groups
• hire a maintence team
• provide incentives to workers

Question 31

what is profit

Answer 31

The difference between revenue and costs.

Question 32

Condition for profit maximisation.

Answer 32

• when TR and TC are furhest apart
• MC=MR

Question 33

Normal profit

Answer 33

return that is sufficient to keep the factors of production committed to the business

Question 34

Supernormal profit

Answer 34

Profit achieved in excess of normal

Question 35

Loss

Answer 35

where the firm fails to cover its costs

Question 36

When should firms still produce?

Answer 36

As long as the average cost is covered

Question 37

if AVC>AR what should firms do

Answer 37

continue to produce

Question 38

if AVC<AR what should firms do

Answer 38

leave the industry

Question 39

In the long turn what should firms do

Answer 39

they need to make at least normal profit