3.3 Revenues, costs and profits Flashcards
3.3.1 A)
Profit formula
Profit = revenue - costs
3.3.1 A)
What is revenue
Total income of a firm from selling goods and servies
3.3.1 A)
Total revenue formula
Price * qty
3.3.1 A)
Average revenue formula
(total revenue /qty )
3.3.1 A)
Marginal revenue formula
change in TR / change in Qty
3.3.1 B)
What is a price maker
Firm that has total control over price this is due to imperfect competion
3.3.1 B)
What is a price taker
Firm with no pricing power who acceptts the current marker price , each unit sold at same price for all firms due to perfect competition
3.3.2 A)
What is a fixed cost
costs that do not var with opt
3.3.2 A)
What is a variable cost
Costs that vary with output
3.3.2 A)
What is a sunk cost
Cost required to start up the firm cannot be recovered if the firms closes
3.3.2 A)
Formula
total costs
marginal costs
total = varable + fixed
marginal = change in total cost / change in opt
3.3.2 B)
Law of diminishing returns
If ^ in variable factors like labour total output will increase and then it each additonal unit will diminish SR
3.2.2 C)
Why is SRAC a U shape
Due to law of diminishing returns
3.2.2 C)
Why is LRAC _/ shaped
Due to (dis)economies of scale
3.2.2 C)
Relationship between SR and LR AC curves
LRAC is either equal to or below relevant SRAC the firm may initally be set up to produce a certain amt effectivly they will cause ^ SRAC due to law of diminishing return due to fixed factors. In LR all variable.
3.2.2 C)
Shifts in LRAC curve
A shift can occur to exteme (dis)economies that can effect cost of production
3.2.2 C)
Movements in LRAC curve
Due to change in output which change AC to internal (dis)economies of scale
3.2.2 C)
Places on LRAC curve
LRAC is a boundary representing the min level of AC attanable at any given level of output. Points below LRAC are unattainable and producing above is in eff
3.3.3)
What are economies of scale
Advantages of large scale production that enables a large busniess to produce at a lower avg cost than a small busniess
firm is able to inc turn to scale, an increase in input will lead to a larger increase in output
3.3.3)
What are diseconmies of scale
Disadvantages that arise in large busniess that reduce eff causing avg cost to increase.
decreasing return to scale, output increase by a smaller scale then the input
3.3.3 A)
What is a technical economy
Arises as a result of what happened to prodcution process
Ex: ^ productivity, v costs, innovation
3.3.3 A)
What is specialisation
Efficenticy specicaled worker and machinery
3.3.3 A)
^ size of area
Size of room inc by 2x doesnt 2x the costs of running
3.3.3 A)
Investment in capital
some process require item of machinary needed a large firms
3.3.3 A)
Research and developmet
only large firms can oford to carry out research
3.3.3 A)
Risk bearing economies
large companies can oporate in diff markets one area does bad whole company doesnt collaspe
3.3.3 A)
managerial economies
Large compares can afford specialist managers
3.3.3 A)
marketing and purchasing economies
bulk buying > cheaper
specialisation > efficent time and knowledge
distribution > v rate for transport
3.3.3 B)
Min eff scale
The minimum level of output needed for a busniess to fully exploit economies of scales. The points where LRAC first levels off
3.3.3 C)
Internal economies of scale
An internal economies of scale is an advanatage that a firm is able to enjoy bcos of growth in the firm independant of anything happening to other firms in the industry
3.3.3 C)
External economies of scale
Is an advantage which arise from the growth of the industry within which the firm operate independant to firm it self. LRAC curve shifts downwards
3.3.3 C)
External economies of scale ex
Labour - busniess est in an areas > labours comes to them reducing costs. Local education, firms hire ppl alr trained
transport links
greater politcal influence
3.3.3 C)
External diseconomies of scale ex
workers - people feel unnoticed so lose motivations
geography - firm may have issues to communicate disance when products are transported
Change - longer to adapt to change
managments - coordination & control, communication
3.3.4)
What is profit
difference between TR and TC
3.3.4 A)
Conditions for profit maximation
TR and TC furthest apart with TR>TC or MC=MR
3.3.4 B)
What is normal profit
Return that is sufficent to keep the facts of production committed for the busniess TR = TC.
3.3.4 B)
What is SNP
If profit > normal profit its SNP. AR>AC or TR>TC
3.3.4 B)
what is loss
Firm fails to cover costs AC>AR or TC>TR
3.3.4 C)
When should a busniess stay open even in loss?
When a busniess is making loss and AR>AVC then firm should continue production each good makes more revenue then cost of production. This will help reducing size of loss by covering fixed cost with the extra revenue. Should shut down when fixed cost will increase/renue.
3.3.4 C)
When should a busniess stay close in loss?
If AVC>AR producing goods will lead to more loss. In LR firm needs to be making atleast NP to stay in busniess. In SR produce while AR>AVC
SR shutdown point AVC=AR
firms produce on this line to not disapoint workers/consumers
3.3.4 C) shut down points
SR shutdown point AVC=AR
LR sdp need to cover all costs AR=AC
