3.3 - Revenues, costs and profits Flashcards
Average revenue
3.3.1 - Revenue
Total revenue per unit of output = TR/Q
Break-even output
3.3.1 - Revenue
The break-even price is when price = average total cost (P=AC). Normal profits are made
Consumer surplus
3.3.1 - Revenue
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)
Marginal revenue
3.3.1 - Revenue
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
Revenue maximisation
3.3.1 - Revenue
Revenue maximisation is an output when marginal revenue = 0 (MR=0)
Total revenue
3.3.1 - Revenue
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
Average total cost
3.3.2 - Costs
Total cost per unit of output = total cost/output = TC/Q
Average cost pricing
3.3.2 - Costs
Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maxmisation
Average fixed cost
3.3.2 - Costs
Total fixed cost per unit of output = TFC/Q
Average variable cost
3.3.2 - Costs
Total variable cost per unit of output = TVC/Q
Capacity
3.3.2 - Costs
The amount that can be produce by a plant, company, or an economy (industrial capacity) over a given period of time
Capital intensive
3.3.2 - Costs
When an industry or production process requires a relatively large amount of capital (fixed assets) or proportionately more capital than labour
Cost-plus pricing
3.3.2 - Costs
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
Cost-reducing innovations
3.3.2 - Costs
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
Diminishing marginal productivity
3.3.2 - Costs
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
Fixed costs
3.3.2 - Costs
Business expenses that do not vary directly with the level of output in the short run
Long run
3.3.2 - Costs
A period of time when all factors of production are variable and a business can change the scale of production
Marginal cost
3.3.2 - Costs
The change in total costs from increasing output by one extra unit
Producer surplus
3.3.2 - Costs
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
Short run
3.3.2 - Costs
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
Sunk costs
3.3.2 - Costs
Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable
Total cost
3.3.2 - Costs
Total cost = total fixed cost + total varible cost (TC = TFC + TVC)
Total fixed cost
3.3.2 - Costs
All fixed costs added together
Total varibale cost
3.3.2 - Costs
All variable costs added together
Variable cost
3.3.2 - Costs
Variable costs are business costs that vary directly with output since more variable inputs are required to increase output. Also know as prime costs
Constant returns
3.3.3 - Economies and diseconomies of scale
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
Diseconomies of scale (internal)
3.3.3 - Economies and diseconomies of scale
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%
Economies of scale
3.3.3 - Economies and diseconomies of scale
Falling long run average cost as output increases in the long run
Economies of scope
3.3.3 - Economies and diseconomies of scale
Where it is cheaper for a business to produce a broader range of products
Excess capacity
3.3.3 - Economies and diseconomies of scale
The difference between the current output of a business and the total amount it could produce in the current time period
Experience curve
3.3.3 - Economies and diseconomies of scale
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
External diseconomies of scale
3.3.3 - Economies and diseconomies of scale
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
External economies of scale
3.3.3 - Economies and diseconomies of scale
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
Internal economies
3.3.3 - Economies and diseconomies of scale
Reductions in the long run average cost from an expansion of the size of a business
Minimum efficient scale
3.3.3 - Economies and diseconomies of scale
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)
Optimal plant size
3.3.3 - Economies and diseconomies of scale
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
Production function
3.3.3 - Economies and diseconomies of scale
The relationship between a firm’s output and the quantities of factor inputs (labour, capital, land) that it employs
Returns to scale
3.3.3 - Economies and diseconomies of scale
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
Abnormal profits
3.3.4 - Normal profits, supernormal profits and losses
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
Equilibrium output
3.3.4 - Normal profits, supernormal profits and losses
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
Marginal profit
3.3.4 - Normal profits, supernormal profits and losses
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
Monopoly profit
3.3.4 - Normal profits, supernormal profits and losses
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
Normal profit
3.3.4 - Normal profits, supernormal profits and losses
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
Profit
3.3.4 - Normal profits, supernormal profits and losses
The excess of revenue over expenses; or a positive return on investment
Profit margin
3.3.4 - Normal profits, supernormal profits and losses
The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control their operating costs
Profit maximisation
3.3.4 - Normal profits, supernormal profits and losses
Profit maximisation occurs when marginal cost = marginal revenue (MC = MR)
Profit per unit
3.3.4 - Normal profits, supernormal profits and losses
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
Retained profit
3.3.4 - Normal profits, supernormal profits and losses
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
Shut down price
3.3.4 - Normal profits, supernormal profits and losses
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable costs (P>AVC)
Supernormal profit
3.3.4 - Normal profits, supernormal profits and losses
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)
