Costs And Revenues Flashcards
Define variable costs?
Costs which change with output in both long and short run (eg. Raw materials).
Average fixed cost = ? (And note)
Fixed costs/quantity
As output increases, fixed cost is spread therefore there’s a fall in AFC.
Average variable cost = ?
Variable costs/quantity
ATC = ?
AFC+AVC
Define marginal cost?
The change in total cost when one additional unit of output is produced.
MC = ?
ΔTC/ΔQ
Why do the AC and AVC lines converge?
Because AC=AFC+AVC, and AFC always falls with increasing Q.
Define fixed costs?
Costs which do not change with output in the short run (eg. Rent).
Define productive efficiency?
When a firm produces at the lowest cost per unit of output (min AC point).
Define allocative efficiency?
When a firm produces at a point where the cost of production and demand of consumers are taken into account to MAXIMISE WELFARE (P=MC).
Define internal economies of scale?
Falling long-run costs due to an increase in output for an individual firm.
What are financial EofS?
When large firms get loans for cheaper since less risk is involved.
What are risk-bearing EofS?
When large firms can increase their range of products, therefore spread risk and minimise effects of a recession.
What is marketing EofS?
As product range increases, firms can use central brand to advertise many products, therefore reducing the marketing cost per product.
What is managerial EofS?
When large firms can employ specialist managers for different departments therefore boosting productivity.
What are increased dimensions EofS?
Large firms can pay for lorries twice the dimensions of smaller firms, allowing them to access 8x as much space.
What are external economies of scale?
Falling long run average costs as a result of growth in the industry in which a firm operates.
2 examples of external EofS and how it looks on a diagram?
Fall in LRAC curve
- innovation that can lead to lower AC (eg. New, more efficient machines to produce goods)
- new roads/transportation can benefit firms (eg. Retailers getting more customers)
Define diseconomies of scale?
A rise in long run average costs of production as output increases.
2 things that cause DEofS?
Lack of communication between different parts of a firm
Lack of focus due to bad management
AR =
TR/Q
TR =
P x Q
Define marginal revenue?
The change in revenue that arises when one extra unit of output is sold (gradient of TR curve).