3.3 Revenues, costs and profits

Question 1

3.3.1 A)
Profit formula

Answer 1

Profit = revenue - costs

Question 2

3.3.1 A)
What is revenue

Answer 2

Total income of a firm from selling goods and servies

Question 3

3.3.1 A)
Total revenue formula

Answer 3

Price * qty

Question 4

3.3.1 A)
Average revenue formula

Answer 4

(total revenue /qty )

Question 5

3.3.1 A)
Marginal revenue formula

Answer 5

change in TR / change in Qty

Question 6

3.3.1 B)
What is a price maker

Answer 6

Firm that has total control over price this is due to imperfect competion

Question 7

3.3.1 B)
What is a price taker

Answer 7

Firm with no pricing power who acceptts the current marker price , each unit sold at same price for all firms due to perfect competition

Question 8

3.3.2 A)
What is a fixed cost

Answer 8

costs that do not var with opt

Question 9

3.3.2 A)
What is a variable cost

Answer 9

Costs that vary with output

Question 10

3.3.2 A)
What is a sunk cost

Answer 10

Cost required to start up the firm cannot be recovered if the firms closes

Question 11

3.3.2 A)
Formula
total costs
marginal costs

Answer 11

total = varable + fixed
marginal = change in total cost / change in opt

Question 12

3.3.2 B)
Law of diminishing returns

Answer 12

If ^ in variable factors like labour total output will increase and then it each additonal unit will diminish SR

Question 13

3.2.2 C)
Why is SRAC a U shape

Answer 13

Due to law of diminishing returns

Question 14

3.2.2 C)
Why is LRAC _/ shaped

Answer 14

Due to (dis)economies of scale

Question 14

3.2.2 C)
Relationship between SR and LR AC curves

Answer 14

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.

Question 15

3.2.2 C)
Shifts in LRAC curve

Answer 15

A shift can occur to exteme (dis)economies that can effect cost of production

Question 16

3.2.2 C)
Movements in LRAC curve

Answer 16

Due to change in output which change AC to internal (dis)economies of scale

Question 17

3.2.2 C)
Places on LRAC curve

Answer 17

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

Question 18

3.3.3)
What are economies of scale

Answer 18

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

Question 19

3.3.3)
What are diseconmies of scale

Answer 19

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

Question 20

3.3.3 A)
What is a technical economy

Answer 20

Arises as a result of what happened to prodcution process
Ex: ^ productivity, v costs, innovation

Question 21

3.3.3 A)
What is specialisation

Answer 21

Efficenticy specicaled worker and machinery

Question 22

3.3.3 A)
^ size of area

Answer 22

Size of room inc by 2x doesnt 2x the costs of running

Question 23

3.3.3 A)
Investment in capital

Answer 23

some process require item of machinary needed a large firms

Question 24

3.3.3 A)
Research and developmet

Answer 24

only large firms can oford to carry out research

Question 25

3.3.3 A)
Risk bearing economies

Answer 25

large companies can oporate in diff markets one area does bad whole company doesnt collaspe

Question 26

3.3.3 A)
managerial economies

Answer 26

Large compares can afford specialist managers

Question 27

3.3.3 A)
marketing and purchasing economies

Answer 27

bulk buying > cheaper
specialisation > efficent time and knowledge
distribution > v rate for transport

Question 28

3.3.3 B)
Min eff scale

Answer 28

The minimum level of output needed for a busniess to fully exploit economies of scales. The points where LRAC first levels off

Question 29

3.3.3 C)
Internal economies of scale

Answer 29

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

Question 30

3.3.3 C)
External economies of scale

Answer 30

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

Question 31

3.3.3 C)
External economies of scale ex

Answer 31

Labour - busniess est in an areas > labours comes to them reducing costs. Local education, firms hire ppl alr trained
transport links
greater politcal influence

Question 32

3.3.3 C)
External diseconomies of scale ex

Answer 32

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

Question 33

3.3.4)
What is profit

Answer 33

difference between TR and TC

Question 34

3.3.4 A)
Conditions for profit maximation

Answer 34

TR and TC furthest apart with TR>TC or MC=MR

Question 35

3.3.4 B)
What is normal profit

Answer 35

Return that is sufficent to keep the facts of production committed for the busniess TR = TC.

Question 36

3.3.4 B)
What is SNP

Answer 36

If profit > normal profit its SNP. AR>AC or TR>TC

Question 37

3.3.4 B)
what is loss

Answer 37

Firm fails to cover costs AC>AR or TC>TR

Question 38

3.3.4 C)
When should a busniess stay open even in loss?

Answer 38

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.

Question 39

3.3.4 C)
When should a busniess stay close in loss?

Answer 39

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

Question 40

3.3.4 C) shut down points

Answer 40

SR shutdown point AVC=AR
LR sdp need to cover all costs AR=AC