Microeconomics 3.2 Costs and Revenue Flashcards
Business Costs and revenues
Short run
period of time when at least one factor of production is fixed in supply.
Long run
the period over which the firm is able to vary the inputs from all the factors of production.
Law of diminishing returns
when the firm increases the input from one factor while other factors remain fixed, eventually the return on the increased factor will reduce.
Marginal physical product of labour (MPP)L
The additional quantity of output produced by an additional unit of labour.
Total cost
The sum of all costs incurred in producing a given level of output.
Average Cost
Total cost divided by quantity (unit cost)
Marginal cost
The cost of producing an additional unit of output.
Fixed costs
Costs that do not vary with the level of output e.g. rent, management salaries
Variable costs
Costs that do vary with the level of output e.g. labour, raw materials, energy
Sunk costs
Costs which will not be recovered if a firm stops trading.
Economies of scale
When a firm increases the scale of production and this leads to lowers long-run average costs.
Technical economies of scale
Larger scale capital goods e.g. container ship of combined harvester.
Marketing economies of scale
Fixed cost of advertising and marketing will be spread over larger number of units.
Management economies of scale
The costs of management can be spread over larger number of units or more specialist staff can be employed in accounting, human resources etc.
Financial economies of scale
Larger firms can borrow money at lower rates of interest.
Purchasing economies of scale
Bulk buying raw materials can lead to a lower price.
External economies of scale
Economies of scale which arise from the expansion of the industry in which a firm is operating.
Internal economies of scale
Economies of scale which arise from the expansion of a firm.
Technology and skills external economies of scale
Skilling of a pool of labour through a local college e.g. Burnley College to local businesses in Burnley.
Economies of scope
Economies of scale to large firms who provide a range of products e.g. Nestle
Diseconomies of scale
When a firm’s increased scale of production leads to higher long-run average costs.
Concentration economies of scale
Where a firm is located close to other firms in the same industry.
Communication diseconomies of scale
It becomes more difficult to communicate across the organisation.
Co-ordination diseconomies of scale
Becomes more difficult to co-ordinate production across a range of factories or countries.
Motivational diseconomies of scale
Managers become demotivated in larger firms. This can lead to profit-satisficing and the principal-agent problem.
Minimum Efficient Scale
The level of output at which long-run average cost stops falling as output increases. Bottom of the LAC.
Constant returns to scale
Range where the minimum efficient scale is constant.
Total Revenue
The revenue received by a firm from its sales of a good or service.
Average revenue
The average revenue received by a the firm per unit of output. Total revenue divided by quantity. It is also price without taxes.
Marginal revenue
The additional revenue received by the firm if it sells an additional unit of output.
Normal profit
the return needed for a firm to stay in the market in the long run. Includes opportunity cost.
Supernormal profit
Profit above normal profits.
Accounting profit
Profit made by a business based on explicit costs incurred but excluding opportunity cost.
Shut down price
The price below which a firm will choose to exit the market because it is not able to pay for its variable costs.
