Business costs, revenues and profits Flashcards
What is profit
Profit is the reward for risk-taking
What is the formula for profit
Profit = Total Revenue - Total COst
What is total revenue
Total revenue is the total income received by a firm from the selling of its products. It is found by the price of its product multiplied by quantity sold
What is the formula for total revenue
Total revenue = Price * Quantity
What are total costs
Total costs are all costs encountered by firms in order to produce goods and services
What is the formula for total costs
Total costs = Fixed costs + Variable costs
What are fixed costs
Fixed costs are the costs that remain the same regardless of the output produced
Give some examples of fixed costs
Rent
Salaries
Insurance
What are variable costs
Variable costs are the costs that vary according to the output produced. They are proportionate to the output
Give some examples of variable costs
Raw materials
Wages
What are average costs
Average costs are the costs per unit of production
What is the formula for average costs
Average costs = Total costs / Total output
What is average revenue
Average revenue is the revenue received per unit sold
What is the break-even point
The break-even point is the point where total costs are equal to total revenue
Give four reasons why profits are important
- Profits can be retained and used for investment purposes, helping the firm remain competitive and ensuring their survival
- Profits can be used to pay out dividends to shareholders
- Profits can be used to judge the success of a firm
- Profits can be used to pay taxes
What are some possible aims for firms other than maximizing profits
1) Profit sacrificing: Profit sacrificing occurs when ownership and management of a firm are separated. Management tries to achieve a sufficient amount of profit to keep shareholders happy, while pursuing other goals in the meantime
2) Survival: Firms may have the objective of survival instead of profit maximization when the climate is unfavorable
3) Cooperatives and public sector firms: These firms have other objectives instead of profit maximization such as pleasing the workers
What are economies of scale
Economies of scale is the fall in the long run average costs as the size and the output of a firm increases
List ways in which firms benefit form internal economies of scale
Financial economies
Purchasing economies
Marketing economies
Technical economies
Managerial economies
Risk-bearing economies
How do firms benefit from financial economies
By becoming bigger, firms can raise money more easily. Large firms have more assets, making them low risk borrowers as they can use these assets as security if they can’t repay the loan. Consequently, banks are willing to loan them money with lower interest rates, resulting in their average costs falling
How do firms benefit from purchasing economies
When a firm gets bigger, they need more materials in order to increase production. This allows them to buy materials in bulk, something that gives them discounts and better prices, resulting in their average costs falling
How do firms benefit from technical economies
As a firm gets bigger, they are able to afford to buy the best machinery and spend money on research and development to come up with new methods of production. These methods are more efficient and help reduce the average costs of firm in the long run
How do firms benefit from managerial economies
As a firm gets bigger, they are able to employ specialist staff such as managers that are highly skilled. These employers help run the business and make production more efficient, reducing average costs in the long run
How do firms benefit from risk-bearing economies
When a firm gets bigger, they can afford to start producing a variety of goods and even sell in wider markets. This allows them to reduce the risk of producing, as they have many alternatives when a product stops being sold. Consequently, they can reduce their average costs as they are not in risk of losing money
What are diseconomies of scale
Diseconomies of scale is the rise in the long run average costs as the size and output of a firm increases
List reasons why a firm might experience diesconomies of scale
Management diseconomies
Labour diseconomies
Adminstrative diseconomies
How do firms experience management diseconomies
When a firm gets bigger, they need to hire more managers in order to run the firm. However, these managers often disagree and it is difficult for them to reach a decision, resulting in productivity falling. Also, these managers have huge salaries that increase costs significantly
How do firms experience labour diseconomies
Large firms use methods like division of labour, which make workers bored as they do the same task all day. This results in them becoming less productive, and increasing average costs in the long run. These workers also have salaries that are costly to firms, further increasing average costs
How do firms experience administrative diseconomies
When a firm gets bigger, there is an increase in bureaucracy such as filling forms or getting permissions. This unnecessary bureaucracy takes a lot of time, slowing down procedures and causing inefficiency
What are external economies of scale
External economies of scales is the fall in the long run average costs an individual firm experiences when the industry in which it operates grows in size
What are the advantages of the whole industry being large
1) Skilled labour: Firms can steal workers already trained by other firms
2) Development of subsidiary industries: Specialist suppliers may arise that provide materials and service and supply parts for machinery
3) Co-operation between firms: Firms work together and bring benefits to the whole industry
4) Infrastructure: If a certain industry is located in a particular region the government may improve road and communication networks in the area to help them
