Business costs, revenues and profit Flashcards
What is the formula for total revenue?
Total Revenue = Price × Quantity sold
What is the formula for total costs?
Total Costs = Total Fixed Costs + Total Variable Costs
What is the formula for total fixed costs?
Total Fixed Costs = Costs that do not change with output (e.g., rent, salaries)
What is the formula for total variable costs?
Total Variable Costs = Costs that vary with output (e.g., raw materials, electricity)
What is the formula for average (total) costs?
Average (Total) Costs = Total Costs ÷ Output
What is the formula for profit?
Profit = Total Revenue − Total Costs
What is the definition of economies of scale?
Economies of scale occur when the average cost of production decreases as the scale of production increases.
What are internal economies of scale?
Internal economies of scale are cost savings that occur within a business as it grows.
What are the types of internal economies of scale?
- Purchasing (bulk buying): Discounts for buying inputs in large quantities.
- Marketing: Spread marketing costs over a larger output.
- Technical: Use of specialized machinery and technology.
- Financial: Access to cheaper loans and financing.
- Managerial: Hiring specialized managers to improve efficiency.
- Risk-bearing: Diversifying products to spread risks.
What are external economies of scale?
External economies of scale are cost savings that occur due to the growth of the entire industry or geographic area.
What are the types of external economies of scale?
- Skilled labour: Availability of trained workers in the area.
- Infrastructure: Improved infrastructure (e.g., transport and utilities).
- Access to suppliers: Proximity to suppliers reduces transport costs.
- Similar businesses in the area: Collaboration and sharing of resources.
What is the definition of diseconomies of scale?
Diseconomies of scale occur when the average cost of production increases as the scale of production grows too large.
What are the types of diseconomies of scale?
- Bureaucracy: Increased administrative tasks slow decision-making.
- Communication problems: Miscommunication in large organizations.
- Lack of control: Difficulty managing a large workforce.
- Distance between management and workers: Reduces motivation and efficiency.
What is the Long Run Average Cost (LRAC) curve?
The LRAC curve shows the relationship between average costs and output in the long run.
It is U-shaped, indicating economies of scale (falling costs) at first and diseconomies of scale (rising costs) as the firm grows too large.
Where is a business most efficient on the LRAC curve?
At the minimum point of the LRAC curve, where average costs are lowest, and the firm achieves optimal efficiency.
