3.3 Revenues, Costs and Profits Flashcards
Total Revenue
The total income a firm receives. TR = Price x quantity
Average revenue
Total revenue/ Quantity
Marginal Revenue
The extra revenue gained from selling an extra unit of good
Profit
The total revenue - Total costs
Normal profit
When TR = TC
The breakeven point for a firm. The minimum profit level necessary to keep the firm in the industry in the long run.
Supernormal Profit
This occurs when TR> TC. Profit above the breakeven point
Operating profit
This occurs where AR> AVC, when average revenue is greater than average variable cost. The firm is making a contribution towards its fixed cost.
Fixed costs
Do not vary with output
Variable costs
Costs that vary with output
Marginal costs
Costs of producing one extra unit
Diminishing Marginal Return
Occurs when employing extra workers leads to declining productivity
Occurs in the SR when one factor is fixed
Profit Maximisation
Occurs where MR=MC
Economies of Scale
Occur when long run average costs fall with increasing output
Internal Economies of Scale
Occur when an individual firm becomes more efficient
Examples of Internal Economies of Scale
Specialisation and division of labour
Bulk buying
Technical- larger more efficient machines
Financial economies- Better rates of interest
Marketing- Wider scale advertising
Risk Bearing- bigger firms can diversify
External Economies of Scale
Occurs when firms benefit from the whole industry getting bigger. All firms will benefit from better infrastructure, access to specialised labour and good supply networks.
Diseconomies of Scale
When LRAC start to rise with increased output.
Examples of Diseconomies of Scale
Poor communication
Alienation- Working in assembly line can be boring and repetitive
Lack of control- larger no. workers is harder to monitor and manage so worker efficiency can decrease.
Minimum Efficient Scale
The minimum point of output necessary to achieve the lowest AC on the LRAC
