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A-level Economics- Theme 3 > Cost, Revenues, Profits & Economies of Scale > Flashcards

Cost, Revenues, Profits & Economies of Scale Flashcards

1
Q

What is total revenue?

A

Amount firm receives from all its sales over a certain period

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2
Q

How do you calculate total revenue?

A

Total Revenue (TR) = price x quantity

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3
Q

What is average revenue also known as?

A

Revenue per unit

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4
Q

What is average revenue?

A

How much people pay per unit … unit price

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5
Q

How do you calculate average revenue?

A 
Average Revenue(AR) = total revenue OR price x quantity/quantity
... in equation form, quantity would cancel out you would be left with just price HENCE why AR = price
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6
Q

What is marginal revenue?

A

Revenue associated with each additional unit sold- change in TR from selling 1 more unit- gradient of total revenue curve

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7
Q

What is average revenue also equal to?

A

Price

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8
Q

What is total revenue also known as?

A

Turnover, sales revenue

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9
Q

Describe the average revenue curve in non-perfect competition and what it shows

A

Basically demand curve- ⬇️ward sloping curve but ⬆️ than MR curve (MR twice as steep as AR)- shows that price needs to ⬇️ to ⬆️ sales
SEE TOP OF PAGE 14 IN THEME 3 BOOK

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10
Q

Describe the marginal revenue curve in non-perfect competition and what it shows

A

Downward sloping BUT twice as steep (lower) as AR curve and goes below 0 revenue to ➖ revenue (when total revenue begins to fall)
MR ⬇️ as more is consumed as consumers have to be charged ⬇️ for them to continue buying (diminishing marginal utility)
SEE TOP OF PAGE 14 IN THEME 3 BOOK

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11
Q

How would you show the changing elasticity in demand on the demand/AR curve?

A
  • On both axis (price and quantity) draw scale of equal size in 2’s to 10
  • Show change in price and quantity at both upper and lower end
  • … calculate PED at both ends FOR PRICE DECREASE
  • Elastic demand (⬇️ than -1 or ⬆️ than 1) should be seen in the ⬆️ half
  • Inelastic demand (⬆️ than -1 or ⬇️ than 1) should be seen in the ⬇️ half

See mid page 14 on theme 3 book

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12
Q

What must you remember when talking about PED?

A

Ignore the minus sign- take the absolute value but include the negative sign in calculations

… PED greater than 1 = elastic AND PED less than 1 = inelastic

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13
Q

What does the changing elasticity along the demand/AR curve show for the relationship between price and TR?

A

On the elastic part of the demand/AR curve:

  • ⬆️ price-> ⬇️ total revenue
  • ⬇️ price-> ⬆️ total revenue

On the inelastic part of the demand/AR curve:

  • ⬆️ price-> ⬆️ total revenue
  • ⬇️ price-> ⬇️ total revenue
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14
Q

Describe the shape of the TR curve

A

N shaped graph (-x^2)- SEE BOTTOM OF PAGE 15- THEME 3 BOOK

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15
Q

Describe how to draw the diagram at the bottom of page 15 (theme 3 book)

A

Price quantity axis for graph on top and revenue quantity axis for graph on bottom
AR curve for graph on top and the MR curve (twice as steep)
Label that top half of AR curve elastic and bottom half inelastic
Label that middle of AR curve unitary (… PED -1 OR 1 in absolute terms)
For bottom TR curve show n curve AND label TR ⬆️ on ⬅️ side and ⬇️ on ➡️ side
Draw dashed line from top half of AR curve (where demand elastic) to part of TR curve which shows TR to be ⬆️ (… ⬅️ side)
Draw dashed line from bottom half of AR curve (where demand inelastic) to part of TR curve which shows TR to be ⬇️ (… ➡️ side)
Draw dashed line from middle of AR curve (where demand unitary) to when MR=0 to mid peak of TR curve

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16
Q

Explain the diagram properly at the bottom of page 15 (theme 3 book)

A

NOTICE in price elastic section, TR is ⬆️ because price is ⬇️ and demand elastic hence-> ⬆️ in revenue
ALSO notice that while MR ➕, TR ⬆️ BUT at ⬇️ rate because MR also ⬇️ … rate of ⬆️ of revenue is ⬇️
NOTICE when PED unitary and when MR=0- revenue maximised
NOTICE in price inelastic section, TR is ⬇️ because price is ⬇️ and demand is inelastic hence a ⬇️ in revenue

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17
Q

Are the AR and MR curves always downwards sloping?

A

No, ONLY downwards sloping when firm is price maker … non-perfect competition
BUT when firm price taker and operating under conditions of perfect competition- AR AND MR curves horizontal

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18
Q

Define short run and what is the explanation behind the occurrence of short run costs

A

Time ⏰ period in which at least 1 FOP (CELL) is fixed

- short run costs explained by law of diminishing returns- because at least 1 FOP fixed-> eventual ⬇️ in output

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19
Q

Define long run and what is the explanation behind the occurrence of long run costs

A

Time ⏰ period when all FOP variable

- long run costs explained by economies and diseconomies of scale

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20
Q

How many types of costs are there and what are they?

A

2 types:

1) Fixed costs
2) Variable costs

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21
Q

What are fixed costs?

A

Fixed costs (overheads)- ✖️ change with output- ONLY apply in short run (when at least 1 FOP fixed) e.g. contract lease of a piece of machinery or rent factory for period of ⏰

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22
Q

What are variable costs?

A

Variable costs- change with output- can occur in short and long run e.g. use of raw materials ⬆️ as output rises … cost of raw materials also ⬆️

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23
Q

How do calculate total costs?

A

Total costs = total fixed costs + total variable costs

24
Q

Define total costs

A

Total costs- include all rewards to the FOP (wages for workers, rent for land, interest on capital and normal profit for entrepreneur)

25
Q

How do you calculate average fixed costs?

A

AFC = fixed costs / output

26
Q

Define average fixed costs (AFC)

A

The fixed costs per unit of output

27
Q

What is unique about average fixed costs?

A

It is an always ⬇️ curve as costs are fixed and only output can ⬆️ … AFC can never ⬆️
As output ⬆️, AFC ⬇️ as fixed costs spread across greater output

28
Q

How do you calculate average variable cost (AVC)?

A

AVC = variable costs / output

29
Q

What is average cost and how do you calculate it?

A 
Average costs (AC) = average total cost (ATC) = average cost per unit of output 
AFC + AVC OR total costs / output
30
Q

What is marginal cost?

A

Change in total costs when 1 more unit of output produced
ALSO gradient of total cost curve
Change in TC / Change in Q

31
Q

What is unique about marginal cost?

A

There is no marginal cost for producing 0 output

32
Q

Where does the marginal cost curve (MC) intersect the average variable cost (AVC) and average total cost curves (ATC) and why?

A

Intersects minimum point of AVC and ATC curves- BECAUSE:

  • whenever marginal cost (cost of 1 extra unit of output) below average cost (cost of each output), average ⬇️
  • if marginal above average then average ⬆️
  • when cost of producing 1 extra unit of output (marginal cost) is = to AC or AVC then average ✖️ change hence intersection at min point- KEY 🔑
33
Q

Describe the short run average cost diagram

A

Costs on y-axis and Quantity on x-axis
MC- ✔️- cuts AC and AVC at minimum points
ATC- above AVC- initially ⬇️ BUT then begins to ⬆️ after intersection with MC curve- as output ⬆️
AVC- below ATC- initially ⬇️ BUT then begins to ⬆️ after intersection with MC curve
AFC- gap between ATC and AVC curve- gaps largest at beginning (⬇️ quantity) and gradually gap ⬇️ (AFC curve = always ⬇️)

34
Q

Explain why the TR curve is an n shaped graph (-x^2)

A

Elastic section:
The ⬇️ in price is smaller than the proportionate ⬆️ in sales … although 🚘 priced lower, sales risen by a larger amount proportionally … revenue ⬆️ in the elastic section
SEE BOTTOM OF PAGE 15- THEME 3 BOOK
Inelastic section:
The ⬇️ in price is greater than the proportionate ⬆️ in sales … although sales have ⬆️, the price of the 🚘 has fallen by a greater amount proportionally … revenue ⬇️ in the inelastic section

35
Q

Explain why the ATC, AVC AND MC curves slope downwards at first and then upwards

A
  • slope ⬇️ due to increasing ⬆️ returns to a fixed factor- as ⬆️ inputs (FOP) are added to a fixed factor, firm ⬆️ output at a larger proportional amount than increase in costs and … ATC, AVC and MC curves ⬇️ (AC=total costs/output) and (AVC=total variable costs/output)
  • slope ⬆️ due to diminishing ⬇️ returns to a fixed factor- as ⬆️ inputs (FOP) are added to a fixed factor, they add ⬇️ and less to total output AND add to costs mainly (due to inefficiencies) … AC and AVC curves ⬆️
36
Q

Describe the long-run average cost diagram

A
  • LRAC curve ⬇️ at first due to economies of scale (cost advantages as output ⬆️)
  • Min efficient scale when g = 0
  • LRAC curve ⬆️ later due to diseconomies of scale (cost disadvantages as output ⬆️)
37
Q

What is unique about costs and average costs in the long run

A

All costs variable AND average costs explained by economies and diseconomies of scale

38
Q

What are internal economies of scale?

A

Falling ⬇️ long run average costs associated with ⬆️ output for an individual firm

39
Q

What are the types of internal economies of scale?

A

1) Financial economies
2) Risk-bearing economies
3) Marketing economies
4) Managerial economies
5) Increased dimensions

40
Q

How many types of internal economies of scale are there?

A

5

41
Q

What are financial economies of scale?

A

As firm grows- better able to access loans at ⬇️ cost- banks have ⬆️ confidence in growing firms with promising business ideas- may-> ⬇️ interest rates offered … ⬆️ willing to lend as ⬇️ risk involved

42
Q

What are risk bearing economies of scale?

A

As firm grows and expands- better able to diversify by developing a range of products-> wider consumer base- spreads risk- minimises impact of any downturn

43
Q

What are marketing economies of scale?

A

As firm expands product range- able to use central band marketing to advertise the range of products its sells at little extra cost- cost for marketing shared over larger number of products hence ⬇️ LRAC

44
Q

What are managerial economies of scale?

A

As firm expands- able to employ specialist managers in finance, sales etc and … ⬆️ productivity and ⬇️ LRAC

45
Q

What are increased dimensions and how is it a type of economies of scale?

A

A cubic box can double in dimensions (… lengths of 2 become 4 for example) and so will its costs BUT its volume will increase by a factor of 8 … costs doesn’t increase at the same rate as volume hence ⬇️ LRAC
… allows 8 times more goods to be transported but price and dimensions only double

46
Q

What are external economies of scale?

A

Falling ⬇️ long run average costs associated with ⬆️ output for an entire industry

47
Q

How do internal economies of scale effect the LRAC curve?

A

Causes movement ⬇️ along LRAC curve- … shows that long run average costs ⬇️

48
Q

How do internal diseconomies of scale effect the LRAC curve?

A

Cause movement ⬆️ along LRAC curve- … shows that long run average costs ⬆️

49
Q

How do external economies of scale effect the LRAC curve?

A

Causes LRAC curve to shift ⬇️

50
Q

How do external diseconomies of scale effect the LRAC curve?

A

Cause LRAC curve to shift ⬆️

51
Q

What are examples of external economies of scale?

A

1) Innovations by other firms may benefit industry they are in … -> ⬇️ in average cost of production
2) Retailers located close to each other able to benefit from development of new roads and transport links 🚘, 🚞 etc … -> ⬇️ in LRAC for all firms
3) Group of small businesses can share administrative and secretarial facilities-> ⬇️ LRAC per unit

52
Q

What are economies of scale?

A

⬇️ in long run average costs as output ⬆️

53
Q

What are diseconomies of scale?

A

⬆️ in long run average costs as output ⬆️

54
Q

Why may diseconomies of scale occur?

A

1) If a firm grows too large and moves beyond its minimum efficient scale
2) Potentially due to breakdown in communication or other managerial difficulties
3) Potentially when firm merges with another firm or grows internally-> becomes too big- management ✖️ experience to maintain managerial focus and control
4) Expansion may ALSO-> ✖️ coordination between departments-> ⬆️ productive inefficiencies, waste and ⬆️ LRAC

55
Q

What is the relationship between the short run and long run average cost curves?

A
  • The LRAC curve is made up of many short run average total cost curves joined together at their lowest points
  • LRAC represent the lowest possible average cost, or cost per unit of output, for every level of output, when all resources variable
  • When firm plans its activities over long run- it chooses where on long-run curve it wishes to be- it will end up on SRATC curve at point where this just touches the LRAC curve- at the end of 1 short run period, a firm can change all its FOP and enter a new short run

A-level Economics- Theme 3 (11 decks)

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