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A Level Economics > 3.3 - Revenues, costs and profits > Flashcards

3.3 - Revenues, costs and profits Flashcards

1
Q

Average revenue

3.3.1 - Revenue

A

Total revenue per unit of output = TR/Q

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2
Q

Break-even output

3.3.1 - Revenue

A

The break-even price is when price = average total cost (P=AC). Normal profits are made

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3
Q

Consumer surplus

3.3.1 - Revenue

A

The difference between the total amount that consumers are willing and able to pay for a good or service and the total amount they actually pay (the market price(

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4
Q

Marginal revenue

3.3.1 - Revenue

A

The revenue earned from selling the last unit of output. It is the addition to the total revenue each time an extra unit is sold

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5
Q

Revenue maximisation

3.3.1 - Revenue

A

Revenue maximisation is an output when marginal revenue = 0 (MR=0)

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6
Q

Total revenue

3.3.1 - Revenue

A

Total revenye (TR) is found by multiplying price (P) by output i.e. number of units sold. Total revenue is maximised when marginal revenue = zero

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7
Q

Average total cost

3.3.2 - Costs

A

Total cost per unit of output = total cost/output = TC/Q

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8
Q

Average cost pricing

3.3.2 - Costs

A

Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maxmisation

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9
Q

Average fixed cost

3.3.2 - Costs

A

Total fixed cost per unit of output = TFC/Q

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10
Q

Average variable cost

3.3.2 - Costs

A

Total variable cost per unit of output = TVC/Q

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11
Q

Capacity

3.3.2 - Costs

A

The amount that can be produce by a plant, company, or an economy (industrial capacity) over a given period of time

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12
Q

Capital intensive

3.3.2 - Costs

A

When an industry or production process requires a relatively large amount of capital (fixed assets) or porportionatelt more capital than labour

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13
Q

Cost-plus pricing

3.3.2 - Costs

A

Where a firm fixes the price for its product by adding a fixed percentage profit margin to the average cost of production. The size of the profit margin may depend on factors including competition and the strength of demand

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14
Q

Cost-reducing innovations

3.3.2 - Costs

A

Cost reducing innovations have the effect of causing an outward shift in market supply. They allow businesses to make high profits with a given level of demand

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15
Q

Diminishing marginal productivity

3.3.2 - Costs

A

As more of a variable factor (e.g. labour) is added to a fixed factor (e.g. capital), a firm will reach a point where it has a disproportionate quantitiy of labour to capital and so the marginal product of labour will fail, thus rasing marginal costs

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16
Q

Fixed costs

3.3.2 - Costs

A

Business expenses that do not vary directly with the level of output in the short run

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17
Q

Long run

3.3.2 - Costs

A

A period of time when all factors of production are variable and a business can change the scale of production

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18
Q

Marginal cost

3.3.2 - Costs

A

The change in total costs from increasing output by one extra unit

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19
Q

Producer surplus

3.3.2 - Costs

A

The difference between what producers are willing and able to supply a good and the price they recieve. Shown by the are above the supply curve and below market price

add photo of producer surplus to this one

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20
Q

Short run

3.3.2 - Costs

A

A time period where at least one factor of production is in fixed supply. We normally assume that the quantitiy of plant and machinery is fixed and that production can be altered through changing labour, raw materials and energy

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21
Q

Sunk costs

3.3.2 - Costs

A

Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable

22
Q

Total cost

3.3.2 - Costs

A

Total cost = total fixed cost + total varible cost (TC = TFC + TVC)

23
Q

Total fixed cost

3.3.2 - Costs

A

All fixed costs added together

24
Q

Total varibale cost

3.3.2 - Costs

A

All variable costs added together

25
Q

Variable cost

3.3.2 - Costs

A

Variable costs are business costs that vary directly with output since more variable inputs are required to increase output. Also know as prime costs

26
Q

Constant returns

3.3.3 - Economies and diseconomies of scale

A

When long run average costs remains constant as output increases because output is rising in proportion to the inputs being used in the production process

27
Q

Diseconomies of scale (internal)

3.3.3 - Economies and diseconomies of scale

A

A business may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising LRAC.. For example, a firm increase all inputs by 300%, its output increase by 200%

28
Q

Economies of scale

3.3.3 - Economies and diseconomies of scale

A

Falling long run average cost as output increases in the long run

29
Q

Economies of scope

3.3.3 - Economies and diseconomies of scale

A

Where it is cheaper for a business to produce a broader range of products

30
Q

Excess capacity

3.3.3 - Economies and diseconomies of scale

A

The difference between the current output of a business and the total amount it could produce in the current time period

31
Q

Experience curve

3.3.3 - Economies and diseconomies of scale

A

Falling unit costs as production of a product or service increases, because the company learns more about it, workers become more skillful. Also know as learning by doing

32
Q

External diseconomies of scale

3.3.3 - Economies and diseconomies of scale

A

When the growth of an industry leads to higher costs for businesses that are part of that industry - for example, increases traffic congestion, higher costs of renting buildings

33
Q

External economies of scale

3.3.3 - Economies and diseconomies of scale

A

When the expansion of an industry leads to the development of ancillary services which benefit suppliers in the industry - causing a downward sloping industry supply curve. A business might benefit from external economies by locating in an area in which industry is already well-established

34
Q

Internal economies

3.3.3 - Economies and diseconomies of scale

A

Reductions in the long run average cost from an expansion of the size of a business

35
Q

Minimum efficient scale

3.3.3 - Economies and diseconomies of scale

A

Scale of production where internal economies of scale have been fully exploited. Corresponds to the lowest point on the long run average cost curve (LRAC)

36
Q

Optimal plant size

3.3.3 - Economies and diseconomies of scale

A

Optimal plant is the size where costs are minimized, i.e. when all economies of scale have been obtained, but diseconomies have not set in. Sometimes the size of a firm or plant is also limited by the size of the market

37
Q

Production function

3.3.3 - Economies and diseconomies of scale

A

The relationship between a firm’s output and the quantities of factor inputs (labour, capital, land) that it employs

38
Q

Returns to scale

3.3.3 - Economies and diseconomies of scale

A

In the long run, all factors of production are variable. How the output of a business responds to a change in factor inputs is called returns to scale

39
Q

Abnormal profits

3.3.4 - Normal profits, supernormal profits and losses

A

Profit in excess of normal profit - also know as supernormal profit or monopoly profit. Abnormal profits may be maintained in a monopolistic market in the long run becuase of barriers to entry

40
Q

Equilibrium output

3.3.4 - Normal profits, supernormal profits and losses

A

A monopolist is assumed to profit maximise, in other words, aims to find an output where MC=MR. At this equilibrium, marginal profit is zero

41
Q

Marginal profit

3.3.4 - Normal profits, supernormal profits and losses

A

The increase in profit when one more unit is sold or the difference between MR and MC. If MR = £20 and MC = £14 then marginal profit = £6

42
Q

Monopoly profit

3.3.4 - Normal profits, supernormal profits and losses

A

A firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors. Barriers to entry protect monopoly profit in the long run

43
Q

Normal profit

3.3.4 - Normal profits, supernormal profits and losses

A

Normal profit is the tranfer of earnings of the entrepreneur i.e. the minimum reward necessary to keep her in her present industry. Normal profit is therefore treated as a fixed cost, included in the average, but not the marginal cost curve

44
Q

Profit

3.3.4 - Normal profits, supernormal profits and losses

A

The excess of revenue over expenses; or a positive return on investment

45
Q

Profit margin

3.3.4 - Normal profits, supernormal profits and losses

A

The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control their operating costs

46
Q

Profit maximisation

3.3.4 - Normal profits, supernormal profits and losses

A

Profit maximisation occurs when marginal cost = marginal revenue (MC = MR)

47
Q

Profit per unit

3.3.4 - Normal profits, supernormal profits and losses

A

Profit per unit (or the profit margin) = AR - ATC. In markets where demand is price inelastic, a business may be able to raise price well above average cost earning a higher profit margin on each unit sold. In more competitve markets, profit margins will be lower because demand is price elastic i.e. consumers are price sensitve

48
Q

Retained profit

3.3.4 - Normal profits, supernormal profits and losses

A

Profit retained by a business for its own use and which is not paid back to the company’s shareholders or paid in taxation to the government

49
Q

Shut down price

3.3.4 - Normal profits, supernormal profits and losses

A

In the short run the firm will contine to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or eqial to average variable costs (P>AVC)

50
Q

Supernormal profit

3.3.4 - Normal profits, supernormal profits and losses

A

A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost (P>AC)

A Level Economics (22 decks)

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