Economics Flashcards
Firms, Costs , Revenue
what are firms
a firm is a business organisation under an independent or distinct ownership
what is an industry
an industry is a group of firms that produce the same or similar product or service.
classification of firms
(economic sector)
Primary
Secondary
Tertiary
what is a small firm
A small firm is an independently owned and operated enterprise that is limited in size and in revenue depending on the industry
advantages of small firms
-they are the major employers in an economy
-they provide many of the raw material and component parts to larger firms
-they provide good and services to the local economy
Disadvantage of small firms
-They usually have limited production capacity and will not be able to meet a large demand for their products
- Small firms are usually unable to benefit from the cost advantages that large firms have.
-They can sometimes find it difficult to raise sufficient capital to finance the expansion of the firm
Types of mergers
Vertical integration (forward or backward)
Horizontal Integration
Conglomerate/lateral Integration
Vertical Integration
Integration/merger of firms engaged in the production of the same type of good but at different levels of production
Backward Vertical Integration
when a firm integrates with a firm that is at an earlier stage of production than theirs and it takes place towards the source of materials
Forward Vertical Integration
when a firm integrates with a firm that is at a later stage of production than theirs and it takes place towards the market for the final products.
Horizontal Integration
this refers to the integration of firms engaged in the production of the same type of good at the same level of production
Lateral/Conglomerate Integration
this occurs when firms producing different type of products integrate. it occurs when two or more firms from different industries merge.they could be at the same or different stages of production.
Economies of Scale
this refers to the cost advantage experienced by a firm when it increases its level of output.
Internal economies of scale (Examples)
Purchasing Economies
Marketing Economies
Technical Economies
Financial Economies
Diseconomies Of Scale
diseconomies of scale are the cost disadvantages that economic actors accrue due to an increase in organisational size or in output, resulting in production of goods and services at increased per-unit costs
External Economies Of Scale
Access to skilled workers
Transport links
Variable costs or Total Variable Cost
Variable costs (VC) are costs that vary directly with output. The more the production, the more the variable costs are. Examples: wages, electricity bill, cost of raw materials.
TVC = TC – TFC
TVC = AVC x Q (Output)
External diseconomies of scale
Cost of labour and other factors
pollution
congestion
More expensive housing
Internal diseconomies of scale
Management problems
Technical problems
Failure to sell output
what is cost
Cost of production, refers to how much it is to make a good/service.
(cost is also known as expenses)
Fixed Costs
Fixed Costs (FC) or Total Fixed Costs (TFC)
Fixed costs are costs that do not change as the level of output changes and they have to be paid even when no production is taking place. These costs do not depend on the amount of output produced. e.g. building rent, management salaries, insurance, bank loan repayments etc.
FC = TC – TVC
FC = AFC x Q (Output)
Total Cost
Total Cost (TC)
The total cost is calculated by adding the fixed costs and the variable costs at different levels of output.
TC = TFC + TVC
TC = ATC x Q (Output)
Average Fixed Costs
Average Fixed Cost (AFC)
It is the fixed cost per unit of output.
AFC = 𝑻𝑭𝑪 𝑸
AFC = ATC – AVC
Average Variable Cost
Average Variable Cost (AVC)
It is the variable cost per unit of output.
AVC = 𝑻𝑽𝑪 𝑸
AVC = ATC – AFC
Average Total Cost
Average Total Cost (ATC)
It is cost per unit of output
ATC = 𝑻𝑪 𝑸
ATC = AFC + AVC
What is Revenue
Revenue is the total income a firm earns from the sale of its goods and services. The more the sales, the more the revenue.
Total Revenue
Total Revenue (TR)
Total Revenue is the total money received by a firm from selling what it has produced.
TR = P x Q
P = Price per unit Q = Quantities sold
Average Revenue
Average Revenue (AR)
Average Revenue is the price a firm charge for its product.
AR = P AR = 𝑻𝑹
𝑸
