3.3 Revenues, costs and profits

Question 1

Revenue

Answer 1

Total revenue is the money earned from the sale of goods and services

Question 2

Formula for revenue

Answer 2

Price x quantity

Question 3

Average revenue (AR)

Answer 3

Revenue received per unit sold

Question 4

Formula for AR

Answer 4

Total revenue / quantity

Question 5

Marginal revenue (MR)

Answer 5

The extra revenue that the firm earns from selling one more unit of production

Question 6

Formula for MR

Answer 6

change in total revenue / change in quantity

Question 7

When price is constant

Answer 7

AR and MR do not change

Question 8

Total fixed cost (TFC)

Answer 8

Costs that do not change with output and remain constant e.g machinery

Question 9

Total variable cost (TVC)

Answer 9

Costs that change directly with output e.g materials

Question 10

Average total cost (ATC)

Answer 10

Total costs / output

Question 11

Average fixed cost (AFC)

Answer 11

Total fixed cost / output

Question 12

Average variable cost (AVC)

Answer 12

Total variable cost / output

Question 13

Marginal cost (MC)

Answer 13

The extra cost of producing one extra unit of a good (change in total cost/ change in output)

Question 14

Short run cost curves

Answer 14

the short run is the length of time when at least one factor of production is fixed and cannot be challenged
Long run = all FOPs become variable

Question 15

Economics of scale

Answer 15

The advantages of large scale production that enables a large business to produce at a lower average cost than a smaller business.

Question 16

Increasing returns to scale

Answer 16

As a result of EOS, firms will experience increasing returns to scale where an increase in inputs by a certain percentage will lead to a greater % increase in output

Question 17

Diseconomies of scale

Answer 17

Disadvantages that arise in large businesses that reduce efficiency and cause AC to rise

Question 18

Decreasing returns to scale

Answer 18

Output increase by a small % than inputs

Question 19

Constant returns to scale

Answer 19

Where firms increase inputs and receive an increase in output by the same %

Question 20

Minimum efficient scale

Answer 20

The minimum level of output needed for a business to fully exploit EOS (LRAC curve first levels off and when constant returns to scale first meets)

Question 21

Internal economies of scale

Answer 21

An advantage that a firm is able to enjoy because of a growth in the firm, independent of any other firms/ industry

Question 22

Technical economies

Answer 22

Rise as a result of production process:
Specialisation - large firms employ specialist workers + machines which do jobs quicker and better
Balanced team of machines - large firms can buy every kind of machine for each stage of prod. Combining machines = every machine runs at optimal level
Increased dimensions - this occurs without doubling costs
Indivisibility of capital - some processes require huge investments that make it only possible to produce on large scale
R&D - allows to gain advantage over competitor

Question 23

Financial economies

Answer 23

Large firms have greater security bc of more assets and less likely to be forced out of business overnight.
Easier for them to obtain finance and I.R will be lower due to lower risk
Investment is more accessible

Question 24

Risk bearing economies

Answer 24

Large firms are able to operate in range of markets producing diff products which means that if one area of business fails, their whole business will not collapse

Question 25

Managerial economies

Answer 25

Large firms can afford to appoint specialist managers in every field = greater knowledge = able to do job better
Staff represent indivisibility and so small firms cannot employ specialist staff

Question 26

Market/ purchasing economies

Answer 26

Buying in bulk - large firms can buy raw materials at a cheaper price than competitors if bought at large amount
Specialisation - firms can afford to take on specialist buyer and seller who are more efficient due to extra knowledge
Distribution - large firms enjoy preferential rates from transport companies because they offer company a lot of businesses