3.3 revenues, costs and profits Flashcards
total revenue
the total amount of money coming into the business through the sale of goods and services. quantity x price
average revenue
demand is equal to AR. total revenue/ output
marginal revenue
the extra revenue that the firm earns from selling one more unit of production. change in total revenue/ change in output
if MR is positive
when the products are sold at a lower price or output is increased, total revenue still grows and so the demand curve is elastic
if MR is negative
TR decreases as price decreases or output increases and so the demand curve in inelastic
when MR=0
TR is maximised and the demand curve is unitary elastic
total cost (TC)
fixed + variable cost
total fixed cost (TFC)
costs that do not change with output and remain constant e.g rent
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)
change in total cost/ change in output
short run
when at least one factor of production is fixed and cannot be changed
long run
when all four factors of production become variable
diminishing marginal productivity
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
average fixed cost curve
-starts high because the whole fixed costs are being divided by a small output
-as output is increased, AFC falls as the same amount is divided by a larger number
average total cost curve
-is U-shaped due to the law of diminishing marginal productivity
-costs initially fall as machinery is used more efficiently but as production continues to expand, efficiency falls as machinery is overused
marginal cost curve
-also U-shaped due to diminishing marginal productivity
-it will initially fall as the machines are used more efficiently but will rise as production continues to rise
relationship between short run and long run cost curves
-short run average cost curves are U-shaped because of the law of diminishing marginal returns
-long run average costs curves are U-shaped because of economies and diseconomies of scale
what is movement long the LRAC curve due to
-a change in output which changes the average cost of production du to internal economies/ diseconomies of scale
-a shift can occur due to external economies/ diseconomies, taxes or technology, which affects the cost of production for a given level of output
economies of scale
the advantages of large scale production that enable large businesses to produce at a lower average cost than smaller businesses
diseconomies of scale
the disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise
constant returns to scale
where firms increase inputs and receive an increase in output by the same percentage
minimum efficient scale
-the minimum level of output needed for a business to fully exploit economies of scale
-the point where the LRAC curve first levels off and when constant returns to scale is first met
internal economies of scale
an advantage that a firm is able to enjoy because of a growth in the firm, independent of anything happening to other firms or the industry in general
technical economies
arise as a result of what happened to the production process
specialisation
large firms are able to appoint specialist workers and buy specialist machines which will be able to do their jobs more quickly and better than machines/ workers which are not specialised
balanced teams of machines
large firms can afford to buy a number of every kind of machine in each stage of production, by combining these machines they can ensure they run each machine at its optimal level
increased dimensions
relates to the fact that if you double the size of the walls you can increase the area by four times without doubling the cost
indivisibility of capital
some processes require huge items of machinery and investment that make it only possible for them to produce on a large scale
research and development
often large firms can afford to carry out large scale research and development, which means they are able to gain a large advantage over their competitor
financial economies
large firms have greater security because they have more assets therefore less likely to be forced out of business overnight as a result, it is easier for them to obtain finance and interest rates will be lower due to lower risk making investment more accessible
risk bearing economies
large companies are able to operate in a range of different markets, producing different products which means that if one area of a business fails, their whole business will not collapse
managerial economies
late companies can afford to appoint specialist managers in every field who are specialised and so have greater knowledge and are able to do their job better
marketing and purchasing economies
-buying in bulk
-specialisation
-distribution
external economies of scale
an advantage which arises from the growth of the industry in which the firm operates, independent to the firm itself
-causes the LRAC curve to shift downwards
