3.3 - Revenues, costs and profits

Question 1

Average revenue

3.3.1 - Revenue

Answer 1

Total revenue per unit of output = TR/Q

Question 2

Break-even output

3.3.1 - Revenue

Answer 2

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

Question 3

Consumer surplus

3.3.1 - Revenue

Answer 3

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(

Question 4

Marginal revenue

3.3.1 - Revenue

Answer 4

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

Question 5

Revenue maximisation

3.3.1 - Revenue

Answer 5

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

Question 6

Total revenue

3.3.1 - Revenue

Answer 6

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

Question 7

Average total cost

3.3.2 - Costs

Answer 7

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

Question 8

Average cost pricing

3.3.2 - Costs

Answer 8

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

Question 9

Average fixed cost

3.3.2 - Costs

Answer 9

Total fixed cost per unit of output = TFC/Q

Question 10

Average variable cost

3.3.2 - Costs

Answer 10

Total variable cost per unit of output = TVC/Q

Question 11

Capacity

3.3.2 - Costs

Answer 11

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

Question 12

Capital intensive

3.3.2 - Costs

Answer 12

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

Question 13

Cost-plus pricing

3.3.2 - Costs

Answer 13

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

Question 14

Cost-reducing innovations

3.3.2 - Costs

Answer 14

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

Question 15

Diminishing marginal productivity

3.3.2 - Costs

Answer 15

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

Question 16

Fixed costs

3.3.2 - Costs

Answer 16

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

Question 17

Long run

3.3.2 - Costs

Answer 17

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

Question 18

Marginal cost

3.3.2 - Costs

Answer 18

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

Question 19

Producer surplus

3.3.2 - Costs

Answer 19

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

Question 20

Short run

3.3.2 - Costs

Answer 20

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

Question 21

Sunk costs

3.3.2 - Costs

Answer 21

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

Question 22

Total cost

3.3.2 - Costs

Answer 22

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

Question 23

Total fixed cost

3.3.2 - Costs

Answer 23

All fixed costs added together

Question 24

Total varibale cost

3.3.2 - Costs

Answer 24

All variable costs added together

Question 25

Variable cost

3.3.2 - Costs

Answer 25

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

Question 26

Constant returns

3.3.3 - Economies and diseconomies of scale

Answer 26

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

Question 27

Diseconomies of scale (internal)

3.3.3 - Economies and diseconomies of scale

Answer 27

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%

Question 28

Economies of scale

3.3.3 - Economies and diseconomies of scale

Answer 28

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

Question 29

Economies of scope

3.3.3 - Economies and diseconomies of scale

Answer 29

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

Question 30

Excess capacity

3.3.3 - Economies and diseconomies of scale

Answer 30

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

Question 31

Experience curve

3.3.3 - Economies and diseconomies of scale

Answer 31

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

Question 32

External diseconomies of scale

3.3.3 - Economies and diseconomies of scale

Answer 32

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

Question 33

External economies of scale

3.3.3 - Economies and diseconomies of scale

Answer 33

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

Question 34

Internal economies

3.3.3 - Economies and diseconomies of scale

Answer 34

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

Question 35

Minimum efficient scale

3.3.3 - Economies and diseconomies of scale

Answer 35

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)

Question 36

Optimal plant size

3.3.3 - Economies and diseconomies of scale

Answer 36

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

Question 37

Production function

3.3.3 - Economies and diseconomies of scale

Answer 37

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

Question 38

Returns to scale

3.3.3 - Economies and diseconomies of scale

Answer 38

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

Question 39

Abnormal profits

3.3.4 - Normal profits, supernormal profits and losses

Answer 39

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

Question 40

Equilibrium output

3.3.4 - Normal profits, supernormal profits and losses

Answer 40

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

Question 41

Marginal profit

3.3.4 - Normal profits, supernormal profits and losses

Answer 41

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

Question 42

Monopoly profit

3.3.4 - Normal profits, supernormal profits and losses

Answer 42

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

Question 43

Normal profit

3.3.4 - Normal profits, supernormal profits and losses

Answer 43

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

Question 44

Profit

3.3.4 - Normal profits, supernormal profits and losses

Answer 44

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

Question 45

Profit margin

3.3.4 - Normal profits, supernormal profits and losses

Answer 45

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

Question 46

Profit maximisation

3.3.4 - Normal profits, supernormal profits and losses

Answer 46

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

Question 47

Profit per unit

3.3.4 - Normal profits, supernormal profits and losses

Answer 47

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

Question 48

Retained profit

3.3.4 - Normal profits, supernormal profits and losses

Answer 48

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

Question 49

Shut down price

3.3.4 - Normal profits, supernormal profits and losses

Answer 49

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)

Question 50

Supernormal profit

3.3.4 - Normal profits, supernormal profits and losses

Answer 50

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)