3.3 Revenues, Costs and Profits Flashcards
What are the 3 types of revenue?
- Total revenue: the total revenue eared from all the output a firm sells
- Average revenue: revenue per unit sold
- Marginal revenue: the additional revenue a firm earns from selling another unit of a good
How is total revenue calculated?
Total Revenue = Price x Quantity
How is average revenue calculated?
Average Revenue = Total Revenue / Quantity
How is marginal revenue calculated?
Change in Total Revenue / Change in Quantity
What are the 3 types of costs?
- Total cost: the total cost of all the output produced by a firm
- Average cost: cost per unit produced
- Marginal cost: the cost of the next/additional unit produced
What is the difference between fixed and variable costs?
- Fixed cost: costs that do not change with output and remain constant e.g rent, salaries
- Variable cost: costs that change directly with output e.g raw materials, wages
How is total cost calculated?
Total Cost = Fixed Costs + Variable Costs
How is average cost calculated?
Average Cost = Total Fixed Costs/Quantity
How is marginal cost calculated?
Marginal Cost = Change in Total Cost/Change in Quantity
What is diminishing marginal productivity/law of diminishing returns?
- Increasing a variable factor of production (e.g labour/materials) while another factor is fixed (e.g land/capital)
- Eventually leads to a relatively smaller increase in output
Describe what leads to diminishing marginal productivity
- If a variable factor is increased when another factor is fixed
- Eventually each extra unit of the variable factor will produce less extra output than the previous unit
Explain the shape of the average fixed cost on a cost curve diagram
- Starts high because fixed costs are being divided by a small output
- As output increases, it falls as it is being divided by a larger quantity
Explain the shape of the average variable cost on a cost curve diagram
- U-shaped
- AVC initially decreases as additional workers each produce additional output
- Moves closer to ATC (as output increases ATC decreases)
Explain the shape of the average total cost on a cost curve diagram
- U-shaped due to the law of diminishing marginal productivity
- Costs initially fall due to more efficient machinery
- As production expands efficiency falls as machinery is overused
Explain the shape of the marginal cost on a cost curve diagram
- U-shaped due to law of diminishing marginal productivity
- Initially falls due to efficient production but rises as production begins to rise
What is the difference between the shape of the long-run and short-run cost curves?
- Short-run curve is U-shaped due to diminishing marginal productivity
- Long-run curve is U-shaped due to economies and diseconomies of scale
Describe what the long run average cost curve represents
- Represents the minimum level of average costs attainable at any given level of output
(Costs below the LRAC are unattainable and producing above is inefficient)
What are economies of scale?
The cost advantage gained by a firm for increasing its level out output (leads to lower long-run average costs)
What are diseconomies of scale?
When a firm grows too large that its cost per unit begins to rise and it becomes inefficient
What are internal economies of scale?
Cost advantages achieved by a firm as a result of its own growth and expansion
What are 2 examples of external economies of scale?
- Labour: increase in labour supply, local training and education providers prepare workers, can hire workers trained by other businesses
- Infrastructure: located in an area with well-developed infrastructure e.g roads, ports/ airports (reduce transportation costs)
What are 5 examples of economies of scale?
- Technical economies: firms able to employ specialist capital resulting in more efficient production
- Risk bearing economies: large firms able to operate in various markets so if one business fails more likely to survive downturns
- Purchasing economies: larger firms buy materials in large quantities so able purchase at cheaper prices
- FInancial economies: large firms have more security so easier to raise capital investment, can borrow at lower interest rates
- Managerial economies: large firms can afford to appoint specialist labour who have greater knowledge, increases productivity
How do workers in a large firm cause diseconomies of scale?
- Workers lose motivation and work less hard (may feel their efforts are unnoticed, less likely to be promoted)
How does the geography of a large firm cause diseconomies of scale?
- Firms have to transport finished goods large distances and may find it difficult to control parts of the businesses which are far away
