Costs, Revenues & Profits Flashcards
Define the law of diminishing returns
The Law of diminishing Returns in the short run, there is a point at which adding more of a variable input (labour) to a fixed set of inputs (machinery) leads to diminishing marginal returns, ultimately affecting total output.
What is stage 1 of diminishing returns
Stage 1 (Increasing Returns): In the initial stage, adding more of the variable input leads to an increase in marginal returns, resulting in rising total output.
What is stage 2 of diminishing returns
Stage 2 (Diminishing Returns): In this stage, the additional output gained from each extra unit of the variable input begins to decline. Marginal returns are still positive but decreasing.
What is stage 3 of diminishing returns
Stage 3 (Negative Returns): Beyond a certain point, adding more of the variable input may lead to negative marginal returns, causing total output to decline.
Define the short run
A time period where at least one factor of production is in fixed supply
Define average product
Average Product is the output per unit of a single input (labour)
Define marginal product
The change in output from increasing the numbers of workers used by one
Define the long run
The long run refers to a period in which all inputs are variable, and firms can adjust their production processes and scale of operations
Define fixed and variable costs
Fixed Costs are costs which don’t change in correlation with output.
Variable are costs which change in correlation with output
Define TR and TC
Total revenue is the amount that a firm has generated just from the number of products they have sold, TR = Price of product x Number sold
The total cost is the amount
Total cost is the amount a firm has spent TC= VC + FC
Define Marginal Revenue and cost
Marginal revenue is the amount of revenue generated from selling 1 extra good, calculated by MR = change in the total revenue/change in quantity sold.
Marginal cost is the amount it costs to create 1 extra good, calculated by MC = change in TC/quantity produced.
Define average revenue and cost
Average revenue represents the average amount of revenue earned by a firm for each unit of output sold. Calculated by AR = TR/Q sold.
Average cost is the average amount it costs a firm to produce a single good, Calculated by AC = TC/Q produced
What are the internal economies of scale
Financial Economies of Scale - larger firms have access to better financial terms, such as lower interest rates on loans.
Managerial Economies of Scale – specialisation of managerial functions and the efficient organization of tasks as a firm expands.
Technical Economies of Scale - improvements in the production process and the utilization of more efficient technologies as the scale of production increases.
Purchasing Economies of Scale - a firm’s ability to obtain bulk discounts and better terms from suppliers.
Marketing Economies of Scale - the cost per unit of advertising and promotion decreases as the scale of marketing activities increases.
What are the internal diseconomies of scale
Decreased Employee Morale - Larger organizations may experience challenges in maintaining high levels of employee morale and motivation.
Managerial Diseconomies - the coordination and communication challenges among a larger number of managers may lead to inefficiencies and increased managerial costs.
Communication Diseconomies - Larger organizations may face challenges in effective communication, leading to misunderstandings, delays, and increased costs associated with ensuring that information flows smoothly.
Loss Of Control - As a firm expands, top management may experience difficulties in maintaining effective control over various operations.
What are the external economies of scale
Market Expansion - Benefits arising from the overall growth of the market or industry, leading to increased demand and opportunities for all firms.
Skilled Labour Pool - a concentration of skilled labour in a particular area, leading to increased availability and lower costs for specialised skills.
Infrastructure improvements - benefits from the development or improvement of infrastructure, such as transportation networks, communication facilities, and utilities, that benefit multiple firms.
What are the external diseconomies of scale
Congestion and Traffic - Increased congestion and traffic in a particular area due to the concentration of firms.
Rising Land Costs - Increased demand for land in a specific area, leading to rising land prices and higher occupancy costs for firms.
Environmental Degradation - Negative impacts on the environment due to the concentration of industrial activities.
Define profit maximisation
Profit maximisation is a concept in economics and business that refers to the process by which a firm seeks to achieve the highest possible level of profit.
Define marginal revenue & marginal cost
Marginal revenue is the additional revenue earned from selling one more unit of a good or service.
Marginal cost is the additional cost incurred in producing one more unit of output.
What is the rule of profit maximisation
The profit maximization rule states that a firm should produce and sell the quantity of output where marginal revenue equals marginal cost (MR = MC)
Define normal profit
Normal profit is the level of profit that allows a firm to cover all its costs, including the opportunity cost of the resources used in production.
TR=TC
Define abnormal profit
Abnormal profit refers to a level of profit that exceeds the normal profit level. It occurs when a firm’s total revenue is higher than its total costs.
TR>TC
