3.3 Revenues, Costs and profits

Question 1

What is Total Revenue?

Answer 1

• Money from goods and services (Price x Quantity)

Question 2

What is Marginal Revenue?

Answer 2

• The revenue gained from selling an additional unit
• Change in total revenue / Change in total output

Question 3

What does an Elastic Demand Curve look like in perfect competition? Why?

Answer 3

• Straight Horizontal Line (MR = D = AR = P)
• Firms in perfect competition have no price setting power

Question 4

What are fixed costs?

Answer 4

• Costs that do not change with output

Question 5

What are variable costs?

Answer 5

• Costs that change with output

Question 6

What is diminishing marginal productivity? Where does it only occur?

Answer 6

• The additional factor of production causes a relatively smaller increase in output
• Only occurs in the short-run

Question 6

What is the short-run?

Answer 6

• At least one factor of production is fixed

Question 7

What is economies of scale?

Answer 7

• Advantages of large scale production (which lowers cost of production)

Question 8

What are Internal Economies of scale?

Answer 8

• Economies of scale that firms enjoy due to growth within the firm (independent of the industry its in)

Question 9

What are the 5 types of Internal Economies of scale?

Answer 9

• Technical
• Financial
• Risk-bearing
• Managerial
• Marketing and Purchasing

Question 10

What are Technical EoS? What are the 5 factors?

Answer 10

• Occurs from what happens to the production process

Factors:
- Specialisation (increased quality and efficiency)
- Balanced team of machines (the right amount of machines needed)
- Increased Dimensions (More space without increasing costs e.g., taller buildings)
- Indivisibility of Capital (larger machines of larger production)
- Research and Development (only large scale can do)

Question 11

What are Financial Economies of scale?

Answer 11

• Large firms with higher security due to more assets (therefore, less risk if market collapses)

Question 12

What are Risk-Bearing Economies?

Answer 12

• Can operate in multiple markets

Question 13

What are Managerial Economies?

Answer 13

• Multiple managers for different fields

Question 14

What are Marketing and Purchasing economies?

Answer 14

• Buying in bulk (cheaper)
• Specialisation (specialist buyers and sellers)
• Distribution (lower transport costs due to company connections and ability to transfer a lot at one time)

Question 15

What is External Economies of Scale and the 2 types?

Answer 15

• Economies of scale from growth of the industry that the firms operates in
• Labour:
  • Well-established firms attract labour
  • Education and training provided in the areas with large businesses
  • Lots of businesses with the same type of training in the same area

Question 16

What are the 4 factors that cause Diseconomies of scale?

Answer 16

• Workers: Loss of motivation and commitment
• Geography: Hard to control business if products need to be transported far
• Prices of Materials: Will rise if demand rises (therefore buying in bulk only goes so far)
• Management: Coordination can be bad between managers and communication can be hard (especially if operating in multiple areas)

Question 17

What is a loss?

Answer 17

• When a firm fails to cover costs (TR < TC)

Question 18

What should a business take into account when deciding to shut down?

Answer 18

• Average variable costs

Question 19

When should a business shut down?

Answer 19

• When AR < AVC
  (In the long-run, a business needs to make at least normal profit to stay in the industry)