3B: Costs, revenues and profits Flashcards
What are the three types of cost?
Fixed costs: Costs that do not vary with output
Variable costs:Costs that do vary with output
Total costs: Fixed + Variable costs
What is the difference between the short run and the long run?
In the short run a firm can change a variable factor of production, such as employees, but in the long run a firm can change the amount of capital such as a larger factory. Economies and dis economies of scale are also present in the long run.
What is the law of diminishing returns
If the variable factor of production is increased, there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product
When does diminishing returns occur?
In the short run when one factor is fixed, e.g. capital, as the variable factor of production is increased the level of production gradually reduces. For example hiring more employees at a small cafe will cause crowding.
What happens when diminishing returns occurs
There will be a decreasing marginal product and increasing marginal cost
What shape is the short run average cost (SRAC) curve due to diminishing returns?
U shaped
Where does the marginal cost curve cut the short run average cost curve?
The MC always cuts the SRAC at its lowest point, when marginal cost is higher than average SRAC will rise.
When do economies of scale occur?
Economies of scale occur when long run average costs fall with increasing output.
What are internal economies of scale?
Internal economies of scale occur when an individual firm becomes more efficient with increasing size.
What do internal economies of scale include?
Specialisation and division of labour
Bulk Buying
Technical, e.g efficiency of buying large machines as a larger company
Financial economics, better interest rates
Marketing
Risk bearing
What are external economies of scale?
When firms benefit from the whole industry getting better, ie better infrastructure, specialized labour. This is why firms often concentrate in certain areas
When do diseconomies of scale occur?
They occur when long run average costs start to rise with increased output, therefore there will be decreasing returns to scale. AS the firm gets bigger it will become less efficient
Why do diseconomies of scale occur?
Poor communication
Alienation, highly specialised assembly lines can be boring, causing workers to be demotivated
Lack of control to ensure productivity by all workers
External diseconomies of scale, when whole industries get too big and suffer from congestion and duplication of routes
Three types of revenue
Total Revenue: TR = P x Q
Average revenue: TR / Q
Marginal revenue: The extra revenue gained from selling an extra unit of a good
Definition of profit
Profit = TR - TC or AR -AC x Q
