Costs, Revenue, Profits

Question 1

What are the two types of cost in economics?

Answer 1

financial cost, opportunity cost

Question 2

How is marginal cost calculated?

Answer 2

Change in total cost/ change in quantity

Question 3

Why are marginal cost curves and average cost curves initially downward sloping?

Answer 3

There is increasing marginal productivity due to two reasons - specialisation between workers, underutilisation of fixed factors of production (eg land, capital).

Question 4

What is the short run in economics?

Answer 4

Describes how there is at least one fixed factor of production.

Question 5

Why do the average cost curves and marginal cost curves have an increasing section?

Answer 5

The law of diminishing marginal returns kicks in, marginal productivity falls. The fixed factors of production become a constraint on production.

Question 6

What shape is the long run average cost curve?

Answer 6

A u shape

Question 7

Which curve is the “Nike tick”

Answer 7

Marginal Cost Curve

Question 8

Where does the marginal cost curve intercept the short run average cost curve?

Answer 8

At the bottom of the curve.

Question 9

Why is the long run average cost curve initially downward sloping?

Answer 9

Economies of scale - unit advantages to expanding production in the long run.

Question 10

Give some examples of internal economies of scale (reasons why the LRAC initially slopes downward)?

Answer 10

Technical economies, Purchasing economies (bulk buying), Managerial economies, Financial economies (lower interest rates given for larger firms), Marketing economies, Specialisation.

Question 11

Why does the long run average cost curve begin to be upward sloping?

Answer 11

Diseconomies of scale set in.

Question 12

What are some examples of diseconomies of scale (the reason why the LRAC curve begins to be upward sloping)?

Answer 12

Control and communication, co-operation, waste/inefficiency, regulatory costs

Question 13

What is the mimiumum efficient scale?

Answer 13

The lowest level of output (on the long run average cost curve) where internal economies of scale have been fully exploited.

Question 14

If MES can only be achieved at very high levels of output then the number of firms in the industry will be very…

Answer 14

Small

Question 15

What are external economies of scale?

Answer 15

A whole industry grows larger and a firms average costs change.

Question 16

What are external diseconomies of scale?

Answer 16

A firms costs increase due to the expansion of an industry.

Question 17

What are examples of external economies of scale?

Answer 17

Cluster effect (firms locating in a certain area makes it more efficient for suppliers to meet a larger base of purchasers), skilled labour (encourages skilled labour to seek this area eg. Silicon Valley), transport links, supportive legislation (greater political influence of larger industry)

Question 18

What are some examples of external diseconomies of scale?

Answer 18

Rapidly growing industry causes traffic congestion. Competition for scarce resources pushes up the cost of rent/wages/raw materials

Question 19

How do external economies of scale affect the LRAC?

Answer 19

They push the curve downwards

Question 20

What is point elasticity of demand?

Answer 20

Elasticity of demand at a particular point on a curve, calculated by %change in quantity over quantity divided by %change in price over price

Question 21

How do you calculate total revenue?

Answer 21

Price x Quantity

Question 22

What is average revenue the same as?

Answer 22

Price (price x quantity/quantity)

Question 23

How do you calculate marginal revenue?

Answer 23

Change in total revenue/quantity

Question 24

When is there maximum total revenue?

Answer 24

When marginal revenue =0

Question 25

Up until MR =0 the firms revenue will increase as the point PED is…

Answer 25

Elastic ( the increase in quantity is greater than the fall in price)

Question 26

What is the point PED when marginal revenue is 0?

Answer 26

Unitary

Question 27

What shape is the total revenue curve?

Answer 27

An upside down U

Question 28

When does the total revenue curve peak?

Answer 28

When MR=0, when the point PED is unitary.

Question 29

What is normal profit?

Answer 29

A firm makes enough revenue to cover costs

Question 30

What is super-normal profit?

Answer 30

When revenue exceeds costs

Question 31

What is sub-normal profit?

Answer 31

When a firm makes a loss as revenue doesn’t cover costs.

Question 32

When does a firm make maximum profit?

Answer 32

Where marginal profit is zero such that MC =MR

Question 33

When does normal profit occur on a diagram?

Answer 33

When average cost = average revenue (or total cost =total revenue)

Question 34

In the long run what type of profit dies a firm need to be making to continue to operate?

Answer 34

Normal profit

Question 35

In the short run if a firm is not making normal profit should it necessarily close down?

Answer 35

No, the firm has to pay off fixed costs, so shutting down COULD POTENTIALLY make it worse off. This is dependent on the relationship between revenue and variable cost.

Question 36

If average revenue is greater than average variable cost but not greater than average total cost a firm should…

Answer 36

Continue production even though it is loss making, Amy generated revenue will contribute towards paying off fixed costs.