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A-Level Economics Edexcel > 3.3 Revenues, Costs & Profits > Flashcards

3.3 Revenues, Costs & Profits Flashcards

1
Q

total revenue definition

A

the total value of all sales a firm incurs

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2
Q

total revenue equation

A

total revenue(TR) = selling price(P) x quantity sold(Q)

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3
Q

definition of average revenue

A

the overall revenue per unit

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4
Q

Average revenue equation

A

average revenue (AR) = TR/Q

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5
Q

Marginal revenue definition

A

the extra revenue received from the sales of an additional unit of output

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6
Q

Marginal revenue equation

A

marginal revenue (MR) = change in TR/ change in Q

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7
Q

in perfect competition what is the relationship between AR and MR

A
  • AR = MR = D
  • perfectly elastic
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8
Q

How does TR change relative to p and q

A

TR increases at a constant rate

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9
Q

in perfect competition what kind of firm is present

A

price taker

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10
Q

What are the qualities of a price taker 3

A
  • every unit of output is sold at the same price
  • a higher price would decrease sales to zero
  • a lower price could result in all sellers lowering their price
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11
Q

in imperfect competition what kind of firm is present

A

price maker

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12
Q

What are the qualities of price maker firms

A
  • in order to sell an additional unit output, the price (AR) must be lowered
  • both AR & MR fall with additional units of sale
  • TR is maximised when MR = 0
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13
Q

in a price maker model, what is the relationship between AR and MR

A

when AR falls, MR falls by twice as much
- thus the gradient of the MR curve is twice as steep as the AR curve
- AR is the demand curve

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14
Q

what is the total revenue rule?

A
  • in order to maximise revenue
  • firms should increase the price of products that are inelastic in demand and decrease prices on products that are elastic in demand
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15
Q

What are fixed costs?

A

costs that do not change as the level of output changes
- these have to be paid whether the output is 0 or 5000
- e.g. building rent, management salaries, insurance, loan repayments

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16
Q

What are variable costs?

A

costs that vary directly with output
- these increase as output increases and vice versa
- e.g. raw material costs, wages of workers directly involved in production

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17
Q

What are marginal costs?

A

cost of producing an additional unit of output

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18
Q

equation for total costs (TC)

A

TC = total fixed costs (TFC) + total variable costs (TVC)

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19
Q

equation for total variable costs

A

TVC = VC x Q

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20
Q

equation for average total costs (ATC)

A

ATC = TC/Q

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21
Q

equation for AFC

A

AFC = TFC/Q

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22
Q

equation for AVC

A

AVC = TVC/Q

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23
Q

equation for MC

A

change in TC / Q

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24
Q

What are the 4 concepts that help to provide understanding of how the cost curves are derived?

A
  • short run
  • long run
  • marginal product of labour
  • law of diminishing marginal productivity
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25
Q

What is the short run?

A

the period of time where at least one factor of production is fixed

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26
Q

what is the long run?

A

the period of time where all factors of production are variable
- also called planning stage as firms can plan for increased capacity and production

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27
Q

What is the marginal product of labour

A

the change in output that results from adding an additional unit of labour

28
Q

What is the law of diminishing marginal productivity

A

in the short run, as variable factors such as labour is added to fixed facts such as capital, there will initially be an increase in productivity

29
Q

what is the however point for law of diminishing marginal productivity?

A

however, a point will be reached where adding additional units begins to decrease productivity due to the relationship between labour and capital

30
Q

what Is the relationship between diminishing marginal returns and the cost curves

A

as the marginal product increases, marginal costs decrease
- there is an inverse relationship
- increasing returns causes decreasing costs

31
Q

how does a firm operate in the long run?

A
  • planning to increase the scale of production
  • larger scale = more output & the firm moves onto a new SRAC curve which the average unit costs are lower
  • in the long run, a growing firm is likely to keep repeating this process
32
Q

when do economies of scale occur

A

as a firm increases its scale of output in the long run, its long run average total costs will initially decrease due to the benefits it receives

33
Q

during the period of economies of scale what happens to the firm

A

increasing returns to scale

34
Q

what is increasing returns to scale

A

occurs when an increase in inputs leading to a larger than proportional increase in outputs

35
Q

when do diseconomies of scale occur?

A

as a firm increases scale of output I’m the long run, its LRATC will start to increase at some point
- the reason for the increase in the LRATC are called diseconomies of scale

36
Q

what does a firm face during diseconomies of scale

A

decreasing returns to scale

37
Q

what are decreasing returns to scale

A

occurs when an increasing quantity of inputs lead to a less than proportional increase in the quantity output

38
Q

What acronym can be used to remember the different economies of scale?

A

really
fun
mums
try
making
pies

39
Q

what are the types of economies of scale?

A
  • risk-bearing
  • financial
  • managerial
  • technological
  • marketing
  • purchasing
40
Q

what is the risk bearing economy of scale?

A
  • when a firm becomes larger
  • their production range can be expanded
  • therefore they can spread the cost of uncertainty
  • if one part is not successful they have other parts to fall back on
41
Q

what is the financial economy of scale?

A
  • banks are willing to lend loans more cheaply to larger firms
  • they are deemed as less risky
  • thus larger forms can take advantage of cheaper credit
42
Q

what is the managerial economy of scale?

A
  • larger firms are more able to specialise and divide their labour
  • they can employ specialist managers and supervisors
  • lowering average costs
43
Q

what is the technological economy of scale?

A

larger firms can afford to invest in more advanced and productive machinery and capital
- lowering AC

44
Q

what is the marketing economy of scale?

A
  • larger firms can divide their marketing budgets across larger outputs
  • so the average cost of advertising per unit is less than that of a smaller firm
45
Q

what is the purchasing economy of scale?

A
  • larger firms can bulk buy
  • each unit costs them less
46
Q

What are the 3 diseconomies of scale?

A
  • control
  • coordination
  • communication
47
Q

What is the control diseconomy of scale?

A
  • becomes harder to monitor how productive the workforce is, as the firm becomes larger
48
Q

What is the coordination diseconomy of scale?

A
  • it is harder and complicated to coordinate every worker
  • as the firms become larger thousands of employees require managing
49
Q

What is the communication diseconomy of scale?

A

workers may start to feel alienated and excluded as the firm grows
- could lead to falls in productivity and increases in AC as motivation diminishes

50
Q

What is the minimum efficient scale

A

the lowest cost point on a LRATC curve
- represents the lowest possible cost per unit that a firm in the industry can achieve in the long run

51
Q

When do external economies of scale occur?

A

when there is an increase in the size of the industry which the firm operates in
- the firm is able to benefit from lower LRATC generated by factors outside of the firm

52
Q

What are the sources of external economies of scale?

A
  • geographic cluster
  • transport links
  • skilled labour
  • favourable legislation
53
Q

How are geographic clusters a source of external economies of scale?

A
  • As an industry grows, ancillary firms move closer to major manufacturers to cut costs and generate more business
  • this lowers LRATC
54
Q

How are transport links a source of external economies of scale?

A
  • improved transport links develop around growing industries in order to help people get to work and improve the transport logistics
  • this lowers the LRATC
55
Q

How is skilled labour a source of external economies of scale?

A
  • increase in skilled labour lower the cost of skilled labour
  • decreasing the LRATC
56
Q

How favourable legislation a source of external economies of scale?

A
  • this generates significant reductions in LRATC
  • because governments support certain industries in order to achieve their wider objectives
57
Q

what are the explicit costs of production?

A

costs which have to be paid e.g. raw materials wages

58
Q

what are the implicit costs of production?

A

opportunity costs of production

59
Q

what is the opportunity cost?

A

cost of the next best alternative to employing the firms resources

60
Q
A
61
Q

what is normal profit?

A
  • occurs when TR = TC
  • aka breaking even
62
Q

When does supernormal profit occur?

A

when TR = TC

63
Q

When does a loss occur?

A

TR<TC

64
Q

What is the short run shutdown point?

A
  • in the short run, if selling price AR is higher than AVC the firm should keep producing
  • when AR>AVC
  • if AR = AC it should shut down
65
Q

when is the long run shutdown point

A
  • if the AR is higher than the AC the firm should remain open
  • AR>AC
  • if the AR =<AC the firm should shut down
66
Q
A

A-Level Economics Edexcel (20 decks)

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