Profit & Economies of Scale Flashcards
What is profit?
When a firm’s revenue exceeds its costs.
What is loss?
When a firm’s costs exceed its revenue.
What is break even?
When a firm’s revenue equals to their costs.
What is the formula for profit?
Profit = Revenue - Cost
What is the formula for total revenue?
Total revenue = Price * Quantity
What is the formula for average revenue?
Average revenue = Total revenue / Quantity
What are fixed costs?
A fixed cost is a cost that does not vary output.
What are variable costs?
A variable cost is a cost that varies with output.
Why is revenue important to firms?
Revenue is important to a business because revenue is the money flowing into a company and this money is required to pay suppliers, secure loans from banks as they would see you have a high credit score and attract investment as they would know they are more likely to get a return on investment.
Why is cost important to firms?
Costs are important to businesses because if a firm faces higher costs, it must raise its prices. After all, profit is revenue-cost.
However, if they increase the prices, consumers would go to buy from other firms, so it is really important for companies if they are going to maintain a healthy profit margin for firms to be efficient and keep costs low, otherwise, they would face losses.
What are economies of scale?
Economies of scale are unit cost advantages of increasing output.
What are diseconomies of scale?
Diseconomies of scale occur when a business grows so large that the costs per unit increase.
What are the types of economies of scale?
Really: Risk bearing
Fun: Financial
Mums: Managerial
Try: Technological
Making: Marketing
Pie : Purchasing
What is Risk-bearing economies of scale?
Larger firms can sell a variety of products which reduces their risk if consumer tastes change
What is Financial economies of scale?
Larger firms have more assets and tend to be more trusted, making it easier to acquire loans
What is Managerial Economies of scale?
Larger firms can hire specialist employees whereas smaller firms have to hire generalists
What is Technological Economies of scale?
Larger firms can afford more expensive machinery which increases productivity
What is Marketing Economies of scale?
Larger firms can spread the fixed costs of marketing across more stores
What is Purchasing Economies of scale?
Larger firms buy in bulk which means that suppliers are willing to give them discounts
What are the types of diseconomies of scale?
Control
Communication
Co-ordination
Motivation
What is control for diseconomies of scale?
Large businesses become more difficult to manage due to their complexity
What is communication for diseconomies of scale?
Messages are more likely to get lost or distorted in large organisations
What is co-ordination for diseconomies of scale?
Firms become too large and bureaucratic leading to slow decision making
What is motivation for diseconomies of scale?
Firms become too large and impersonal leading to worker demotivation
