3.3 revenues, costs and profits

Question 1

What is the calculation for total revenue

Answer 1

selling price x quantity sold

Question 2

What is the calculation for average revenue

Answer 2

Total revenue / quantity sold

Question 3

What is marginal revenue

Answer 3

The extra revenue received from the sale of an additional unit

Question 4

what is perfect competition

Answer 4

a market structure where individual firms have no market power due to the amount of competition and are unable to influence the price

Question 5

What is imperfect competion?

Answer 5

A market structure where firms do have some market power and can influence prices e.g. monopolies, oligopolies

Question 6

what is the calculation for MR

Answer 6

change in TR / change in Q

Question 7

What does the term price taker refer to?

Answer 7

Firms that have no market power and are unable to influence the price

Question 8

What does the term price maker refer to

Answer 8

A firm with market power that is able to manipulate prices in order to change demand

Question 9

What are fixed costs

Answer 9

Costs that DO NOT change with the level of output

Question 10

What are variable costs?

Answer 10

Costs that DO change with the level of output

Question 11

What are marginal costs?

Answer 11

The cost of producing an additional unit of output

Question 12

What is the formula for total costs

Answer 12

total fixed costs = total variable costs

Question 13

What is the formula for total variable costs

Answer 13

variable cost x quanity

Question 14

What is the formula for average total cost

Answer 14

Total cost / quantity

Question 15

What is the formula for average fixed cost

Answer 15

total fixed costs / quantity

Question 16

What is the formula for average variable costs

Answer 16

Total variable costs / quantity

Question 17

What is the formula for marginal cost

Answer 17

change in total cost / change in quantity

Question 18

When does a short run cost curve occur

Answer 18

When at least one factor of production is fixed

Question 19

When does a long run cost curve occur

Answer 19

When all factors of production are variable

Question 20

What is marginal product of labour (cost curve) (MP)

Answer 20

change in output that results from adding an additional unit of labour

Question 21

What is the law of diminishing marginal productivity (cost curve)

Answer 21

in the short run as more of a variable factor is added to fixed factors there will initially be an increase in productivity. However, a point will be reached where adding additional units begins to decrease productivity due to the relationship between labour and capital

Question 22

When does increasing returns to scale occur

Answer 22

when an increase in inputs leads to a larger than proportional increase in output

Question 23

When does decreasing returns to scale occur

Answer 23

when an increase in the quantity of inputs leads to a less than proportional increase in the quantity of output

Question 24

What is meant by financial economies of scale

Answer 24

Large firms often receive lower interest rates on loans than smaller firms as smaller firms are perceived as less risky

Question 25

What is meant by Managerial economies of scale

Answer 25

When large firms can employ specialist managers who are more efficient at certain tasks and this lowers average costs

Question 26

What is meant by marketing economies of scale

Answer 26

Large firms spread the cost of advertising over a large number of sales and this reduces average costs

Question 27

What is meant by purchasing economies of scale

Answer 27

When large firms buy raw materials in greater volumes and receive a bulk purchase discount which lowers average costs

Question 28

What is meant by technical economies of scale

Answer 28

When a firm is able to use its machinery at a higher level of capacity due to the increased output. Therefore, spreading the cost over more units and decreasing Average costs

Question 29

What is meant by risk-bearing economies of scale

Answer 29

When a firm is able to spread the risk of failure by increasing its number of products

Question 30

What is meant by management diseconomies of scale

Answer 30

When managers work more in their self interest that in the interest of the firm

Question 31

What is meant by communication diseconomies of scale

Answer 31

When a firm with multiple layers of management and perhaps in multiple geographic locations , struggle to communicate quickly and efficiently. Therefore, leading to slow responses and an increase in average costs

Question 32

What is meant by geographical diseconomies of scale

Answer 32

When a firm has widespread bases of operation and this leads to logistical and communication challenges which raise average costs

Question 33

What is meant by cultural diseconomies of scale

Answer 33

When a firm expands into foreign markets in which workers have very different cultural work/ productivity norms which can raise the average cost

Question 34

What is the minimum efficient scale

Answer 34

The lowest cost point on a long run total cost curve. It represents the lowest possible cost per unit that a firm in the industry can achieve in the long run

Question 35

What are internal economies of scale?

Answer 35

occur as a result of the growth in the scale of production within the firm

Question 36

What are examples of internal economies of scale?

Answer 36

Financial economies marketing economies managerial economies purchasing economies technical economies risk-bearing economies

Question 37

What are examples of sources of external economies of scale

Answer 37

Geographic cluster Transport links Skilled labour Favorable legislation

Question 38

What is external economies of scale?

Answer 38

When there is an increase in the size of the industry which the firm operates . The firm is able to benefit from lower average costs generated by factors outside of the firm

Question 39

What is the source of external economies of scale: geographic cluster

Answer 39

As an industry grows, ancillary firms move closer to major manufacturers to cut costs and generate more business, This lowers the average cost

Question 40

What are ancillary firms?

Answer 40

firms that supply and provide materials/services to larger firms

Question 41

What is the source of external economies of scale: Transport links

Answer 41

Improved transport links developing around growing industries allow for people to get to work easier and improve transport logistics.

Question 42

What is the source of external economies of scale: skilled labour

Answer 42

An increase in skilled labour can lower the cost of skilled labour , therefore decreasing average costs

Question 43

What is the source of external economies of scale: favourable legislation

Answer 43

government may support certain industries in order to achieve their wider objectives. for example subsidies which decrease the average cost

Question 44

what are explicit costs?

Answer 44

costs which have to be paid

Question 45

What are implicit costs