3.3 - Revenues, Costs and Profits

Question 1

Total revenue

Answer 1

The amount the firm receives from all its sales over a certain period.
TR = price x quantity

Question 2

Average revenue

Answer 2

Also known as revenue per unit, its the demand curve.

AR = TR / quantity

Question 3

Marginal revenue

Answer 3

It’s the revenue associated with each additional unit sold, i.e. the change in total revenue from selling one more unit. It’s the gradient of the total revenue curve.

Question 4

What is the short run?

Answer 4

A time period in which at least one factor of production is fixed.

Question 5

What is the long run?

Answer 5

A time period when all factors of production are variable.

Question 6

What are fixed costs?

Answer 6

Costs that don’t vary with output - they can only occur in the SR.

Question 7

What are variable costs?

Answer 7

Costs that vary with output, such as raw material consumption in a manufacturing process as output increases.

Question 8

What are total costs?

Answer 8

Fixed + variable costs

Question 9

Average fixed costs

Answer 9

AFC = fixed costs/output

As output inc, AFC will always fall as the fixed costs is being spread over a greater output.

Question 10

Average variable cost

Answer 10

AVC = variable costs/output

Question 11

Average total cost

Answer 11

AC or ATC = AFC + AVC

Average cost per unit of output

Question 12

Marginal Cost

Answer 12

The change in total cost when one additional unit of output is produced. It’s the gradient of the total cost curve.

Question 13

MC crossing AVC and AC

Answer 13

MC goes through min point of AVC and AC. If MC > AC, the average must be rising. The only time that the the average isn’t falling or rising is when MC = AC.

Question 14

Deriving the short-run average cost curve

Answer 14

AC and AVC curves slope downwards because of increasing returns to a fixed factor. As greater inputs are added to a fixed factor, the firm will inc output at a faster rate and therefore AC will fall. But beyond the the lowest point of the AC and AVC, firms begin to experience diminishing returns to a fixed factor and therefore as more factors of production are added to a fixed factor, they start to add less than the last to total output and the AC and AVC start to increase.

Question 15

What are internal economies of scale?

Answer 15

Falling long-run AC associated with an increase in output for an individual firm.

Question 16

Types of internal economies of scale

Answer 16

• financial economies: as firm grows, easier to access loans at low cost as banks see less risk involved
• risk-bearing economies: better available to develop a range of profits and a wider customer base to spread risk and minimise the impact of any downturn
• marketing economies: as it expands product range, its able to use any central brand marketing to advertise the range at little extra cost and therefore spread this across a wider range of goods and lower long-run average cost
• managerial economies: as a firm expands, it’s in a position to employ specialist managers in finance, sales or operations and therefore inc productivity and lower LR AC
• increased dimensions: a haulage company is able to expand the quantities it carries by doubling the dimensions and therefore the costs, but in consequence its vloume inc eight times.

Question 17

What’s an economy of scale?

Answer 17

A fall in LR AC as output increases.

Question 18

What are external economies of scale?

Answer 18

They have impacts on the entire industry and therefore lower the LR AC curve.

Question 19

Examples of external economies of scale

Answer 19

• an industry may benefit as a result of innovations produced by other firms and therefore all firm will see their AC of production fall.
• development of new roads and transport links can benefit local retailers and so lower the LR AC of all the firms
• group of small business could share administrative and secretarial facilities andR therefore lower LR costs per unit.

Question 20

Diseconomies of scale

Answer 20

An inc in LRAC as output increased. Often associated with managerial difficulties. May occur if it grows too large and exceeds minimum efficient scale.