Cost Of Production, Revenue And Profit Flashcards
What is profit?
Profit is the money a business keeps after it has paid all of its costs
What is revenue?
The money a business has before costs are deducted
What do businesses do with their profits?
- save it to maximise money they can earn from interest
- invest it and accumulate profit
- give bonuses to employees to reward them for their work
Four factors of production?
-land : reward is rent
-labour: reward is wages
-capital: reward is interest
-enterprise: reward is profit
What is land (factor of production)
Anything provided by nature to help produce goods and services
What is enterprise (factor of production)
Enterprise is a person who wants to start something new
What is capital (factor of production)?
Physical items made by people to produce goods and services
What is labour ( factor of production?)
People involved in producing a good or service
What are fixed costs?
Expenses that a business must pay regardless of how much it produces or sells . They do not change with the level of output, e.g. rent, salaries, insurance and equipment depreciation. It is a straight line across the graph.
What are variable costs?
Expenses that change depending on how much a business produces or sells. It is a straight line or curve upwards.
What are total costs?
The complete expenses incurred by a business when producing goods or services. It includes all the costs associated with production such as fixed and variable costs. Understanding total costs helps businesses to set prices and make decisions about production and profitability.
What is average cost?
Total cost divided by the quantity of output
What is marginal cost?
The additional cost of producing one more unit of output
The relationship between marginal and average costs?
When the marginal is greater than the average, the average rises. when the marginal is less than the average the average falls. when the marginal is equal to the average there is no change in the average
Calculations
Marginal cost= change in total cost divided by change in quantity
Average fixed costs= fixed cost divided by quantity
Average variable cost= variable cost divided by quantity
Average total cost= AFC + AVC
What are economies of scale?
Refers to the cost advantages that a business can achieve as it grows larger and produces more goods or services
When do economies of scale happen?
When certain costs, such as rent or machinery, are spread out over more items as production increases. Plus, bugger businesses can often negotiate discounts on materials or get better deals from suppliers
What are diseconomies of scale?
Diseconomies of scale happens when a business grows too big and instead of saving money, it starts costing more to produce each item. As the company gets larger, managing everything becomes harder. Stock can go off as the company is making more than they can sell, machinery is overused and resources are wasted.
How to avoid diseconomies of scale?
- Improve communication: use fewer layers of management to speed up decision making
- Invest in technology: use advanced software and machinery to streamline production, inventory management and logistics
- Maintain employee motivation and productivity: celebrate employee achievements to keep morale high
Diseconomies of scale can lead to problems such as:
Diseconomies of scale can lead to problems such as:
1. Communication issues: takes longer to share information and make decisions
2. Coordination problems: harder to keep evryone on the same page, which can lead to delays and mistakes
3. Low motivation: in some large companies, employees may feel like just a number, which decreases their productivity
What is normal profit?
Normal profit occurs when a firm’s total revenue equals its total costs (including opportunity costs)
What is supernormal profit.
Supernormal profit happens when a firm earns more than just covering its costs- it has extra earnings above normal profit
What are explicit costs?
The direct, out of pocket pay,enter that a business makes to operate. They involve actual cash transactions and are easily identifiable in financial records.e.g rent, wages, utility bills, raw material costs
What are implicit costs?
The opportunity costs of using resources that a business already owns. They do not involve direct cash payments but represent the value of alternatives forgone. E.g owner’s time, foregone salary, or the income a property could have generated if rented out instead of being used by the business
How does a business achieve maximum market share?
- Charge unsustainably low priced for a period of time
- Spend large sums of money on advertising
- Spend large sums of money on acquiring other firms to buy out competition and take total control
