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Economics > 3.3 Revenues, costs and profits > Flashcards

3.3 Revenues, costs and profits Flashcards

1
Q

What is a price maker/setter?

A

A firm that has sufficient market power to influence the price of the good it is selling and faces a downward sloping demand curve.

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2
Q

What is a price taker?

A

A firm that has to offer its product at the same price as everyone else.

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3
Q

What is total revenue (TR)?

A

The total amount of money a firm receives.

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4
Q

How is total revenue (TR) calculated?

A

TR = P X Q

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5
Q

What is revenue maximisation?

A

The output at which total revenue is at a maximum (price maker).

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6
Q

Draw a diagram of ‘total revenue’ (TR) for both price taking and making firms:

A
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7
Q

What is average revenue (AR)?

A

The price the firm receives per unit sold.

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8
Q

What is average revenue (AR) the same as?

A

The demand curve.

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9
Q

How is average revenue (AR) calculated?

A

AR = TR / Q

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10
Q

What is marginal revenue (MR)?

A

The change in total revenue from selling one more unit of output.

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11
Q

How is marginal revenue (MR) calculated?

A

MR = ∆TR / ∆Q

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12
Q

Draw a diagram of ‘marginal revenue’ (MR) and average revenue’ (AR) for both price taking and making firms:

A
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13
Q

What is total cost (TC)?

A

Refers to producing a given level of output

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14
Q

What is total fixed cost (TFC)?

A

Costs that do not change directly with output, e.g. rent paid for a factory building.

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15
Q

What is total variable cost (TVC)?

A

Costs that vary directly with output, e.g. variable prices of raw materials.

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16
Q

How is total cost (TC) calculated?

A

TC = TFC + TVC

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17
Q

How is total fixed cost (TFC) calculated?

A

TFC = TC -TVC

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18
Q

How is total variable cost (TVC) calculated?

A

TVC = TC -TFC

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19
Q

Draw a diagram of ‘total cost’ (TC), ‘total fixed cost’ (TFC) and ‘total variable cost’ (TVC):

A
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20
Q

What is average cost (AC)?

A

The cost per unit of output.

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21
Q

Why does average cost (AC) initially fall as more is produced?

A

The fixed cost is spread over more units of output.

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22
Q

How is average cost (AC) calculated?

A

AC = TC / Q

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23
Q

What is average fixed cost (AFC)?

A

The fixed cost per unit of output.

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24
Q

Why does average fixed cost (AFC) cost fall as output increases?

A

Fixed costs do not change with output, so as more is produced, total fixed cost (TFC) is spread out more.

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25
Q

How is average fixed cost (AFC) calculated?

A

AFC = TFC / Q

26
Q

What is average variable cost (AVC)?

A

The variable cost per unit of output

27
Q

How is average fixed variable cost (AVC) calculated?

A

AVC = TVC / Q

28
Q

What is marginal cost (MC)?

A

The cost to the firm of making one more unit of output.

29
Q

How marginal cost (MC) calculated?

A

MC = ∆TC / ∆Q

30
Q

Explain the relationship between average cost (AC) and marginal cost (MC):

A

When MC is below AC, the cost of producing the next unit is less than the AC of producing a unit. Due to this, an extra unit produced brings down AC.

When MC is above AC, the cost of producing the next unit is more than the AC of producing a unit. Due to this, an extra unit produced brings up AC.

Therefore, MC cuts AC at its minimum point.

31
Q

Draw a diagram of ‘average cost’ (AC), ‘average variable cost’ (AVC) and ‘marginal cost’ (MC):

A
32
Q

What is the law of diminishing returns?

A

States that as more units of a variable factor are added to a fixed factor, the increase in output (marginal product) eventually falls.

33
Q

Why is the law of diminishing returns only applicable in the short-run?

A

Because it assumes that at least one factor of production is fixed.

34
Q

What is total product (TP)?

A

The total output of a firm in a given period of time.

35
Q

What is average product (AP)?

A

The unit of output produced per unit of a variable factor of production.

36
Q

How is average product (AP) calculated?

A

AP = TP / Q

37
Q

What is marginal product (MP)?

A

The change in output resulting from employing one more unit of the variable factor.

38
Q

How is marginal product (MP) calculated?

A

MP = ∆TP / ∆Q

39
Q

Draw a diagram of ‘average product’ (AP) and ‘marginal product’ (MP):

A
40
Q

How are average product (AP) and marginal product (MP) related to marginal cost (MC) and average variable cost (AVC) diagrammatically?

A

They are the respective mirror images.

41
Q

Draw a diagram of ‘short run average cost’ (SRAC) and ‘long run average cost’ (LRAC):

A
42
Q

What are internal economies of scale?

A

Occur when the long run average costs (LRAC) of a firm decrease as firm increases in size.

43
Q

What are external economies of scale?

A

Occur when the long run average costs (LRAC) of a firm decrease as the whole industry increases in size.

44
Q

What are the 6 types of internal economies of scale?

Hint:
(Really Fun Mums Try Making Pies)

A

Risk-bearing economies - large firms can diversify to spread risk. For example they become less vulnerable to changes in taste as they operate in a variety of markets.

Financial economies - large firms can issue shares on the stock market and care considered lower risk to banks so can have lower interest rates.

Managerial economies - larger firms can increase efficiency by employing highly skilled and experienced managers.

Technical economies - for example, larger facilities can produce greater volumes of output and bigger warehouses are able to store this.

Marketing economies - as a firm increases in size, the cost of advertising is spread across more output and potential customers.

Purchasing (commercial) economies - large firms are able to bulk-buy at lower prices from their suppliers, because they are buying large amounts at a consistent rate.

45
Q

What is the minimum efficient scale (MES)?

A

The output at which the long run average costs (LRAC) curve reaches a minimum.

46
Q

What are constant returns to scale?

A

Occur when an increase in the scale of production results in an exactly proportional increase in output. Long run average costs (LRAC) curve in horizontal.

47
Q

What are diseconomies of scale?

A

Occur when long run average costs (LRAC) increase as output increases.

48
Q

What are the 4 types of diseconomies of scale?

A

X-inefficiency - as the size of the firm increases, administration costs may also rise disproportionately. Further, a lack of competition may allow prices to rise.

Poor communication - lines of communication between managers and workers may become complex, leading to delays.

Demotivation - larger businesses can feel impersonal meaning workers may not feel valued. This can lead to a fall in productivity.

Poor co-ordination - large firms can become difficult to manage, especially if they are operating in different countries. Different time zones and languages make effective communication more difficult.

49
Q

How do external economies of scale cause the long run average costs (LRAC) to shift?

A

Downwards, without any direct involvement by the firm itself.

50
Q

Provide 2 examples of external economies of scale:

A

Transport improvements that benefit firms, e.g. HS2

New methods of production, e.g. robot vacuum cleaners

51
Q

What are external diseconomies of scale?

A

Where the long run average costs (LRAC) curve moves upwards, without any direct involvement by the firm itself.

52
Q

Provide 2 examples of external diseconomies of scale:

A

There may be higher costs, e.g. if a firm wants offices in a different location.

Congestion can occur, e.g. if the location a firm operates in rapidly grows up, transportation can take longer and cost more.

53
Q

What is meant by profit?

A

Profit is the reward for risk taking. It’s the difference between revenue and cost.

54
Q

What is profit maximisation?

A

Where a firm cannot increase profit anymore, whether by increasing or decreasing price or output.

55
Q

Where does profit maximisation occur?

A

MC = MR

56
Q

What is normal profit?

A

This is the minimum necessary to keep the risk-taking resources in their current use. It does not act as a signal for firms to enter or leave the market.

57
Q

Where does normal profit occur?

A

AC = AR or TC = TR

58
Q

What is supernormal profit?

A

Profit above the minimum required to stay in business.

59
Q

Where does supernormal profit occur?

A

AC < AR or TC < TR

60
Q

What is a loss?

A

Losses occur when TC > TR. A firm does not automatically shut down when making a loss, if it is covering average variable cost (AVC) it will stay in business in the short-run.

61
Q

Where is the shutdown point of a firm?

A

P = AVC

Economics (13 decks)

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