3.3 Revenues, costs and profits Flashcards

1
Q

what is revenue?

A

income from selling goods and services
total revenue = quantity x price

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2
Q

what is marginal revenue?

A

the change in revenue from selling one extra unit
= change in total rev/change in quantity

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3
Q

what is average revenue?

A

price per unit = total revenue/quantity

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4
Q

what are price takers?

A

no control over price and must accept what the price set by the market is
- operate in highly (perfect) competitive markets, price-taking firms stay horizontal as the price doesn’t need to decrease to gain sales
- perfectly elastic demand curve, taking firms

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5
Q

what are price makers?

A

have the ability/power to set their own prices for the goods and services they sell
- happens in all imperfectly competitive markets
- demand curve is downward sloping

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6
Q

what are fixed costs?

A

costs do not vary at all
eg
- consulting fees
- rental costs
- fixed salaries

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7
Q

what are variable costs?

A

cost that relate directly to the production or sale of a product.
eg
- basic raw materials
- packaging costs
- wage costs

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8
Q

how do you calculate total costs?

A

total fixed costs + total variable costs

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9
Q

how do you calculate marginal costs?

A

change in total cost/change in total quantity

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10
Q

how do you calculate average costs?

A

total Cost/output

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11
Q

what is marginal product?

A

the additional output produced when an extra worker (or other factor of production) is employed

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12
Q

what is the average product (same as productivity)?

A

total output/total no. of workers

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13
Q

what are diminishing returns?

A

increasing input after an optimal capacity has been reached (only happens in short run)
- at least one production variable is kept constant, such as labour or capital. ➡️ eventually an increase in the input will result in smaller increases in output
- explains the shape of the SRAC curve

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14
Q

what causes shifts in the short term cost curve?

A
  • changes in unit cost of production
  • a fall in the exchange rate
  • technological advancements
  • entry of new products into the market
  • favourable weather conditions
  • taxes, subsidies and government regulations
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15
Q

how does a rise in fixed costs affect the supply curve?

A

costs will only shift the AC curve and not the MC curve; a change in variable costs will shift both
- upward shift in AC

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16
Q

how can the govt affect businesses fixed prices?

A
  • changed in VAT
  • environmental taxes
  • changes in market labour intervention, minimum wage
  • govt subsidies targeting producer
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17
Q

in the short run what is the marginal product curve?

A

at least one factor of production is fixed, when more and more variable factors are added eventually less extra will be produced with the addition of the extra variable factor of production

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18
Q

what are economies of scale?

A

advantages that arise for a firm because of its large size, or scale of operation ➡️ a fall in average costs

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19
Q

examples of internal economies of scale?

A
  • purchasing bulk
  • technical
  • managerial
  • marketing
  • financial options avaliable
  • risk bearing
  • social and welfare
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20
Q

what are diseconomies of scale?

A

inefficiencies that can creep in when a firm operates on a larger scale, these factors lead to a rise in average cost s

21
Q

example of diseconomies of scale?

A
  • lack of motivation, more difficult for managers in larger firms to develop the right kind of relationship
  • poor communication
  • co-ordination
22
Q

long run average cost and economies of scale?

A

economies of scale are when long run average costs fall as output rises
- these lower costs represent an improvement in productive efficiency + can either lead to lower prices for consumers or higher profits
- as all factors of production are variable the scale of production can change
➡️ as long as the long run average total cost curve is declining, then internal economies of scale are being exploited by the business

23
Q

what are technical economies of scale?

A
  • expensive capital inputs, investment in technical equipment to improve efficiency
  • specialisation of the workforce, bigger business = more staff = more money for specialists
  • law of increased dimensions (container principle, important in energy sectors, office rental and warehousing) where doubling areas can cause more increase in cubic capacity
  • learning by doing, production experience leads to reduced costs
24
Q

what are marketing economics of scale?

A
  • in large firms costs like advertising have a less sign. impact
  • can purchase factor inputs in bulk at lower prices (monopsony power)
25
Q

what are managerial economies of scale?

A
  • division of labour where firms employ specialists to supervise production systems
  • better management can aid productivity
26
Q

what are financial economies of scale?

A
  • the financial markets usually think larger firms are more credit worthy and so have access to much larger funds
  • smaller firms often pay higher interest rate on overdrafts and loans + find it harder to raise money on the stock market
27
Q

what are network economies of scale?

A

high fixed costs of establishing a network, the more users there are the lower are the fixed costs
per unit
- as a network expands, not only are there gains from extra revenues, but the long run cost per user
diminishes ➡️ this is an internal economy of scale and a key factor behind the profitability of network businesses

28
Q

what are external economies of scale?

A

change outside the business which lead to a fall in average costs as an industry grows
- the entire LRAC curve will shift down

29
Q

examples of external economies of scale?

A
  • university research helping research funding
  • transport lowing logistic costs
  • relocation of suppliers to the centre of production
  • influx of human capital
30
Q

what are external dis-economies?

A

as the industry grows demand for its suppliers will increase and pulls prices upwards

31
Q

what do diseconomies of scale mean?

A
  • a business has moved beyond its optimum size
  • localisation of businesses leads to increased demand for transport ➡️ transport cost rises
  • comp among firms for the factors of production + raw materials ➡️ raises the price of raw materials and other factors of production
32
Q

causes of diseconomies of scale?

A
  • control and communication problems - co operation problems
  • negative effects of internal corporate politics
  • result from a business expanding beyond an optimum size and losing productive efficiency
33
Q

consequences of diseconomies of scale?

A
  • rise in a firm’s long run average cost of production
  • higher long run average costs will reduce the profitability of a business if their prices remain the same
34
Q

what is the minimum efficient scale?

A

the scale of production when internal economies of scale have been completely exploited
- MES corresponds to the lowest level of output at which the lowest point on a firm LRAC reaches

35
Q

what causes a business to have a high minimum efficient scale?

A
  • fixed costs of setting up a business is hard
  • the cost of supplying to new customers is relatively low to fixed costs
    eg
  • gas, and water suppliers
36
Q

what is normal profit?

A

the minimum profit needed to keep factor inputs in their current use in the long run
- AR= AC

37
Q

what is supernormal profit?

A

when AR > AC

38
Q

how can you increase profits?

A
  • reduce overhead costs
  • increase labour productivity
  • move up the value chain
  • develop new products with a lower price elasticity of demand and higher income elasticity of demand
  • discount prices if the business estimates that demand is highly price elastic
  • find new customers in new markets
39
Q

when are profits maximised?

A

profits are maximised at an output level where marginal revenue (MR) is equal to marginal cost (MC)

40
Q

short-run profit diagram?

A

a firm will supply their products as long as price per unit is greater than or qual to average variable cost➡️ because there is a contribution being
made to covering the fixed costs of production

41
Q

long run profit diagram?

A

a business needs to make at least normal profit in the long run to justify remaining in an industry
- firms can survive while making a loss because the managers are satisficing, or where a downturn is seen as
temporary and demand is expected to pick up again

42
Q

what are returns to scales?

A

how the output of a business responds to changes in inputs

constant returns = increasing inputs leads to an equivilent increase in outputs

43
Q

what is long run production?

A
  • all factors of production are variable
  • in the long run, businesses will be looking for a way to combine labour and capital to maximise productivity and reduces unit costs to their lowest possible level
44
Q

what are increasing returns to scale?

A

% change in output> % change in input

45
Q

what are decreasing returns to scale?

A

% change in input> % change in output

46
Q

what are constant returns to scale?

A

% change in ouput = % change in input

47
Q

analysis for long run average cost curve?

A
  • all factors of production are variable meaning the scale of production can change
  • economies of scale exist when long-run average costs fall as output rises
  • the lower costs represent an improvement in productive efficiency and can give a business a competitive advantage in a market
48
Q
A
49
Q
A