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Sutherland > 3.3 Revenues, Costs And Profits > Flashcards

3.3 Revenues, Costs And Profits Flashcards

1
Q

Three Main ways to look at revenue.

A

-Total revenue= quantity x price
-Average revenue= total revenue / quantity
-Marginal revenue= change in total revenue / change in quantity

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2
Q

revenue is

A

Revenue is the income generated from the sale of goods and services in a market

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3
Q

Maximising revenue

A

-Maximum total revenue occurs where marginal revenue is zero

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4
Q

Price taker

A

-No control over price and must accept what the price is set by the market
-Price takers operate in highly (perfectly) competitive markets
-Perfectly elastic demand curve
-Price takers have a low percentage market share
-Their TR curve will simply be an upwards sloping line

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5
Q

Price makers

A

-Price makers have the ability / power to set their own prices for the goods and services they sell
-This happens in all imperfectly competitive markets
-The demand curve (AR curve) is downward sloping
-Marginal revenue (MR) will lie below AR

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6
Q

Price elasticity of demand

A

% change in quantity demanded/ % change in price

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7
Q

<1
=1
>1

A

<1 inelastic
=1 unitary
>1 elastic

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8
Q

Economic costs

A

-Economic costs are incurred by a business engaged in producing / supplying an output
-Explicitcosts and opportunuty costs

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9
Q

Fixed costs

A

-do not vary at all as the level of output changes in the short run
-Fixed cost has to be paid, whatever the level of sales achieved.
-Fixed costs are incurred even if output is zero
in the short run
-The higher the level of fixed costs in a business, the higher must be the output in order to break-even

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10
Q

Variable costs

A

-Variable costs are costs that relate directly to the production or sale of a product.
-An increase in short run output (Q) will cause total variable cost to rise (TVC).
-Average variable cost (AVC) = total variable cost / output (i.e. TVC divided by Q).
-Variable cost is determined by the marginal cost of extra units as more labour is hired.

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11
Q

The short run

A

Is a period of time when there is at least one fixed factor of production
-this is usually fixed capital such as machinery and the amount of factory space available

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12
Q

what is diminishing marginal returns

A

-Adding an additional factor of production results in smaller increases in output
-When more reliable factors of production are added to fixed factor production, then eventually less extra will be produced with the additional of the extra viable factor of production

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13
Q

Direct product cost

A

variable cost

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14
Q

Non production costs

A

Fixed

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15
Q

What is marginal product?

A

-How much does one additional worker add

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16
Q

Why is the marginal product curve shaped like this?

A

Up to the top, it specialisation, then become diminishing marginal returns

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17
Q

Short run curves

A

Have specialisation and diminishing marginal returns

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18
Q

Causes of shifts in short run costs

A
  1. Changes in the unit costs of production
    -Lower unit costs mean that a business can supply more at each price
    -Higher unit costs cause an inward shift of supply
  2. A fall (depreciation) in the exchange rate causes higher prices of imported components and raw materials
  3. Advances in production technologies – outward shift of supply
  4. The entry of new producers into the market – outward shift
  5. Favourable weather conditions
  6. Taxes, subsidies and government regulations
    -Indirect taxes cause an inward shift of supply
    -Subsidies cause an outward shift of supply
    -Regulations increase costs – causing an inward shift of supply
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19
Q

Long run curve

A

Because of economies of scale and diseconomies of scale

20
Q

Ways in which changes in government economic policy can influence the costs of businesses

A
  1. Changes in value added tax (VAT) and other indirect taxes on producers such as the Sugar Levy
  2. Environmental taxes (including a possible carbon tax) and introducing a minimum price for each tonne of
    carbon emitted within the EU carbon trading scheme
  3. Changes in labour market interventions such as the National Minimum Wage
  4. Government subsidies targeting producers such as an employment subsidy or guaranteed minimum payment
21
Q

Economies of scale

A

cost per unit decreases in output increases

22
Q

Internal economies of scale

A

are advantages that arise for a firm, because of its largest size, or a scale of operation. This leads to a fall in average costs.

23
Q

Internal Types of economies of scale

A

-purchasing bulk
-technical
-managerial
-Marketing
-Financial
-risk bearing
-Social and welfare

24
Q

Purchasing bulk economies of scale

A

Buying of raw materials

25
Q

Technical economies of scale

A

Investing in new technology to produce faster/cheaper

26
Q

Marketing economies of scale

A

Access to large scale promotion

27
Q

Financial economies of scale

A

Wide range of finance options available. Might be able to negotiate lower rate with lender

28
Q

Risk bearing economies of scale

A

A more diversified product range means that a larger firm has more resilience

29
Q

Social and welfare economies of scale

A

Can give more benefits to staff, and therefore tracked and retain good employees

30
Q

Diseconomies of scale

A

-these are in efficiencies that can creep in when firms operates on a larger scale
-these factors lead to a rise in average costs

31
Q

A lack of motivation diseconomies of scale

A
  • in larger firms, workers can feel that they are not appreciative valued as individuals.
    -It can be more difficult for managers in a large firm to develop the right kind of relationship with workers.
    -If motivation force, productivity may fall leading to inefficiencies
32
Q

Poor communication-diseconomies of scale

A

It can be easier for smaller firms to communicate with all staff in personal way
- In larger firms, there is likely to be use written of notes rather than by explaining in personality
-Messages can remain unread or misunderstood and staff are not properly informed

33
Q

Co-ordination- diseconomies of scale

A

-a very large business takes a lot of organising, leading to an increase in meetings and planning to ensure that all staff know what they are supposed to be doing
-new layers of management may be required, adding to costs and creating further links in the chain of communication

34
Q

relationship between long run and short run curve

A

-a series of short run curve that makes up long run curve

35
Q

External economies of scale

A

are factors that lead to a fall in average costs as an industry grows

36
Q

difference between internal and external economies of scale.

A

-internal- are costs fall when the firm grows
-external- are costs fall when the industry the is in is growing

37
Q

examples of external economies of scale

A

-could get parts locally so cheaper
-ready supply of labour

38
Q

characteristics of external economies of scale

A

-lots of firms doing similar things can share resources if they locate close together
-high number of staff with desired skills reduces training requirements
-ability to pool/share R+D
-supplier and service providers to that industry may chose to locate close by
-may even see improved infrastructure and public transport

39
Q

characteristics of external diseconomies of scale

A

-as the industry grows demand for its supplies will increase and all prices up
-localisation of businesses leads to increased demand for transport and therefore costs rise
-competition among firms for the factors of production and the raw materials. This raise the price of raw materials and other factors of production

40
Q

What is the minimum efficient scale?

A
  • It is the scale of production where all of the internal economies of scale have been fully exploited
  • MES corresponds to the lowest level of output at which the lowest point on a firm’s long run average cost
    curve (LRAC) is reached
  • MES is likely to be low relative to the size of market demand in a very competitive industry – this means there
    is room for many businesses to compete for example, hotels competing for custom in a city centre
  • MES is likely to be high in a natural monopoly – which means that the industry will be highly concentrated
  • If LRAC remains the same as output increases, then a firm is experiencing constant returns to scale
41
Q

minimum efficient scale

A

The minimum efficient scale is the scale of output where internal
economies of scale have been fully exploited

42
Q

Three causes of a business having a high minimum efficient scale

A
  1. MES will tend to be high when the fixed costs of setting up production are large
  2. MES will tend to be high when the marginal cost of supplying to extra customers is low relative to fixed costs.
  3. With a natural monopoly, long run average cost may continue to fall across the entire range of output which
    means that the minimum efficient scale is a very high percentage of total market demand. Thus, there might
    be room for only one firm to fully exploit economies of scale.
43
Q

Normal profits

A
  • TR=TC
  • Normal profit is the minimum profit needed to keep factor inputs in their current use in the long run.
  • If price at least covers AC then a business is making normal profits in a market
44
Q

Supernormal profit

A
  • Profit achieved in excess of normal profit.
  • Profit when AR > AC
  • When firms are making supernormal profits, there is an incentive for other producers to enter a market
  • Note that you may sometimes see supernormal profits referred to as abnormal profits – this is the same thing!
45
Q

Subnormal profit

A
  • This is profit less than normal (i.e. price per unit < average cost)
  • Also known as an economic loss
  • If we looked at a business’s accounts, it may appear that they are making an “accounting profit” (remember
    that accountants do not include opportunity cost in the business’s costs of production)
46
Q

Importance of Profit

A
  1. Finance for capital investment and research: Retained profits are a key source of finance for businesses
    undertaking investment + funds for acquisitions
  2. Market entry: Rising supernormal profits send signals to other producers within a market
  3. Demand for and flow of factor resources: Resources flow where the risk-adjusted rate of profit is highest
  4. Signals about health of the economy: Rising profits might reflect improvements in supply-side performance.
    They are also the result of higher levels of aggregate demand for example during an economic recovery
47
Q

Strategies to increase profit

A
  1. Reduce overhead costs (fixed costs) so that average cost per unit falls
  2. Increase labour productivity / outsource some production to lower cost suppliers
  3. Move up the value chain – develop new products with a lower price elasticity of demand and higher income
    elasticity of demand
  4. Discount prices if the business estimates that demand is highly price elastic
  5. Find new customers in new markets e.g. from exporting to more countries

Sutherland (9 decks)

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