3.3 - Revenues, Costs, and Profits

Question 1

What is total revenue?

Answer 1

The total amount of money coming into the business through the sale of goods and services (quantity x price)

Question 2

What is average revenue?

Answer 2

Demand is equal to AR = (total revenue/output)

Question 3

What is marginal revenue?

Answer 3

The extra revenue that the firm earns from selling one more unit of production = (total revenue from ‘n’ goods - total revenue from ‘n-1’ goods) OR (change in total revenue/change in output)

Question 4

What is the relationship between PED and revenue?

Answer 4

• If marginal revenue is positive, when the firm sells the product at a lower price (or when they increase output), total revenue still grows and so the demand curve is elastic - until output Q (where TR peaks), the demand curve is elastic
• If MR is negative, TR decreases as price decreases (or output increases) and so the demand curve is inelastic. After output Q, the demand curve is inelastic
  *When MR=0, TR is maximised, and the demand curve is unitary elastic, this is at point Q

Question 5

What are total costs?

Answer 5

The cost of producing a given level of output (fixed + variable costs)

Question 6

What are total fixed costs?

Answer 6

Costs that do not change with output and remain constant

Question 7

What are total variable costs?

Answer 7

Costs that change directly with output

Question 8

What are average (total) costs?

Answer 8

(total costs/output)

Question 9

What are average fixed costs?

Answer 9

(total fixed costs/output)

Question 10

What are average variable costs?

Answer 10

(total variable costs/output)

Question 11

What are marginal costs (MC)?

Answer 11

The extra cost of producing one extra unit of a good = (total cost of producing n goods - total cost of producing n-1 goods) OR (change in total cost/change in output)

Question 12

What is the short run?

Answer 12

The short run is the length of time when at least one factor of production is fixed and cannot be changed; this varies massively with different types of production. The long run is when all factors of production become variable

Question 13

What is meant by diminishing marginal productivity (returns)?

Answer 13

If a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit
* Marginal output will decrease as more inputs are added in the short run. This will mean that the marginal cost of production will rise

Question 14

What are economies of scale?

Answer 14

It is an advantage that a firm is able to enjoy because of a growth in the firm / industry

Question 15

What are the internal economies of scale?

Answer 15

*Purchasing bulk
* Technical
*Managerial
* Marketing
* Financial
* Risk bearing
* Social and welfare

Question 16

What are purchasing bulk economies of scale?

Answer 16

Buying raw materials in larger volumes to receive each at a lower cost per unit

Question 17

What are technical economies of scale?

Answer 17

Investing in new technology to produce faster/cheaper i.e. increasing efficiency

Question 18

What are managerial economies of scale?

Answer 18

Ability to hire specialist managers to run business functions leading to better planning and decision making

Question 19

What are marketing economies of scale?

Answer 19

Access to large scale promotion so it lowers the unit cost of promotion and marketing

Question 20

What are financial economies of scale?

Answer 20

Wider range of finance options available - might be able to negotiate lower rates with lenders

Question 21

What are risk bearing economies of scale?

Answer 21

A more diversified product range means that a larger firm has more resilience as risk is spread over a large product portfolio

Question 22

What are social and welfare economies of scale?

Answer 22

Can give more benefits to staff and therefore attract and retain good employees, allowing for output to increase as workers are more efficient and skilled