3.3 Revenues, costs and profits Flashcards
Revenue
Total revenue is the money earned from the sale of goods and services
Formula for revenue
Price x quantity
Average revenue (AR)
Revenue received per unit sold
Formula for AR
Total revenue / quantity
Marginal revenue (MR)
The extra revenue that the firm earns from selling one more unit of production
Formula for MR
change in total revenue / change in quantity
When price is constant
AR and MR do not change
Total fixed cost (TFC)
Costs that do not change with output and remain constant e.g machinery
Total variable cost (TVC)
Costs that change directly with output e.g materials
Average total cost (ATC)
Total costs / output
Average fixed cost (AFC)
Total fixed cost / output
Average variable cost (AVC)
Total variable cost / output
Marginal cost (MC)
The extra cost of producing one extra unit of a good (change in total cost/ change in output)
Short run cost curves
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
Economics of scale
The advantages of large scale production that enables a large business to produce at a lower average cost than a smaller business.
Increasing returns to scale
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
Diseconomies of scale
Disadvantages that arise in large businesses that reduce efficiency and cause AC to rise
Decreasing returns to scale
Output increase by a small % than inputs
Constant returns to scale
Where firms increase inputs and receive an increase in output by the same %
Minimum efficient scale
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)
Internal economies of scale
An advantage that a firm is able to enjoy because of a growth in the firm, independent of any other firms/ industry
Technical economies
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
Financial economies
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
Risk bearing economies
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
Managerial economies
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
Market/ purchasing economies
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
