3.3 - revenues, costs and profits Flashcards
What are fixed costs and variable costs?
Variable costs are costs that change as output changes, fixed costs stay the same as output changes. In the long run there are only variable costs.
What are purchasing economies of scale?
When firms grow, they can bulk buy products and negotiate low prices, reducing their LRAC.
What are technical economies of scale?
When firms invest in specialist capital which allows them to increase their productivity and decrease their LRAC.
What are managerial economies of scale?
When big firms hire specialist managers who help increase productivity and decrease LRAC.
What are marketing economies of scale?
When big firms spread their marketing costs across many units of output, reducing their LRAC.
What are financial economies of scale?
Big firms with high profits are less risky to lend to, so banks will offer lower interest rates to big firms which reduces LRAC.
What are risk-bearing economies of scale?
Big firms can diversify, which reduces the cost of failure.
What is the difference between external and internal economies of scale?
External economies of scale is when LRAC falls after the industry grows in size, but internal economies of scale is when LRAC falls after a firm’s output increases.
What is normal profit, supernormal profit and a loss?
Normal profit - when TR=TC
Supernormal profit - when TR >TC
Loss - when TR<TC
Why is profit maximised at MR=MC?
Because at that point the additional profit from selling one extra unit is £0.
What is the short run shut down point?
When AR=AVC
