MICRO Costs, Revenue & Profits

Question 1

Marginal Costs

Answer 1

The change in total costs from producing one additional unit.

Question 2

Supernormal Profits

Answer 2

profit in excess of normal profit which is the minimum return required to keep an enterprise in its current use

Question 3

Economies of Scale

• Definition

Answer 3

A fall in long-run average costs as output increases.

Question 4

Economies of Scale

• Types

Answer 4

• Purchasing: bulk buying
• Marketing: spreding advertisement costs over more units
• Technical: access to advanced technology

Question 5

MES

• Stands for…
• Definition

Answer 5

Minimum efficient scale

First lowest point on the long run average cost curve (LRAC); lowest output at which average costs are minimalised.

Question 6

Diseconomies of Scale

• Types

Answer 6

• Co-ordination: hard to co-ordinate complex production processes over multiple plants.
• Control: hard to monitor productivity and quality of all employees
• Co-operation: alienisation = lower productivity = higher costs

Question 7

Diminishing (marginal) returns to a variable factor

Answer 7

Occurs in the short run when the addition to total output (marginal product), from employing one extra variable factor, decreases.

• Variable factor is combined with factors, at least one of which is fixed in terms of size or scale.
• Eventually decreasing average product

Question 8

Increasing returns to scale

(increasing, constant and decreasing)

Answer 8

Occurs in the long run when the addition to total output (marginal product), from employing an additional input, increases.

• Results from economies of scale.
• All factors are free to vary in size or scale.

Question 9

External Economies of Scale (EEoS)

• Definition
• Effect on the diagram
• Examples

Answer 9

• When the long term expansion of an industry leads to benefits shared by a number of firms, therefore reducing long-run average costs
• Shifts LRAC down
• Examples:
• Relocation of key component suppliers
• Investment into infrastructure e.g. transport connections
• Links with research businesses e.g. universities
• Industry expertise / skilled labour = relocates and/or increases

Question 10

What point will a firm consider shutting down?

What point will a firm shut down?

Answer 10

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