Revenues, Costs and Profit Flashcards
What is the formula for Total Revenue?
TR = P x Q
(Total Revenue = Price x Quantity)
What is the formula for Average Revenue?
AR = TR / Q
(Average Revenue = Total Revenue / Quantity)
What is the formula for Marginal Revenue?
MR = ΔTR / ΔQ
(Marginal Revenue = [change in] Total Revenue / [change in] Quantity
Where can you identify revenue maximisation on a graph?
Where MR = 0
Marginal Revenue = 0
Explain Short run cost
(brief understanding needed)
Short-run costs: In the short run, costs are divided into two categories: variable costs and fixed costs. Variable costs change with the level of production. For example, as a firm produces more units, it incurs higher variable costs, such as labour and raw materials. Fixed costs remain constant in the short run because the firm cannot change its fixed inputs. Examples of fixed costs include rent on a factory and the depreciation of machinery.
Time Horizon:
Short-run costs: The short run refers to a period of time during which at least one factors of production are fixed or cannot be changed. In the short run, a firm can adjust its production level by varying the variable factors, such as labour and raw materials. However, it cannot change its fixed factors, such as plant and equipment.
(brief understanding needed)
Explain Long run cost
(brief understanding needed)
Long-run costs: In the long run, all costs are variable because a firm can adjust its production capacity and all inputs can be modified. This means that both variable costs and fixed costs can change in response to changes in production levels or the scale of operations.
Time Horizon:
Long-run costs: The long run, on the other hand, is a period of time in which all factors of production are variable, meaning a firm can adjust both its variable factors and its fixed factors. In the long run, firms have more flexibility to adapt to changing conditions and can make adjustments to their production processes, including expanding or reducing their capacity. This allows them - in theory - to achieve increasing returns to scale, otherwise known as economies of scale.
(brief understanding needed)
What is economics of scale
The cost advantage experienced by a firm when it increases its level of output
What are the different types of economies of scale and their meaning?
(brief understanding needed)
Technical Economies: These occur when a firm can produce goods or services more efficiently as it increases its scale of production. Factors such as specialization of labour, better utilization of machinery, and improved production processes can lead to technical economies of scale.
Managerial Economies: Larger firms may benefit from having specialized management teams, better coordination, and more efficient decision-making processes. This can result in cost savings and increased efficiency.
Marketing Economies: As firms grow larger, they often have more resources to allocate to marketing and advertising efforts. This can lead to lower advertising costs per unit sold and increased market presence.
Financial Economies: Larger firms may have access to more favourable financing options, including lower interest rates on loans and better terms from suppliers due to their size and financial stability.
Risk-Bearing Economies: Larger firms may be better equipped to handle unexpected market fluctuations and risks, reducing the overall cost of risk management.
What is diseconomies of scale?
When a company or business grows so large that the costs per unit increase.
What are the different types of diseconomies of scale and their meaning?
(brief understanding needed)
Managerial Diseconomies: As firms become very large, the management structure can become overly complex and less efficient. Communication breakdowns and bureaucracy may increase, leading to higher costs.
Coordination and Control Problems: Larger firms often struggle to maintain effective control and coordination among various departments and divisions, leading to inefficiencies and higher costs.
Worker Alienation:
In very large organizations, employees may feel disconnected from the company’s goals and values, which can result in lower productivity and higher turnover rates.
Communication Challenges: With an increase in size, communication becomes more challenging, leading to misunderstandings and errors that can increase costs.
What is the minimum efficient scale (MES)
The minimum efficient scale (MES) is when the unit cost is at its lowest possible point while the company is producing its goods effectively.
What is Internal economies of scale?
(brief understanding needed)
Internal economies of scale refer to the cost advantages that a single firm can achieve as it grows in size and expands its production capacity.
These cost savings are typically a result of factors under the firm’s direct control, such as improved production processes, specialization of labor, and better management practices.
Internal economies of scale are specific to the individual firm and are a result of its internal operations and decisions.
(brief understanding needed)
What is External economies of scale?
(brief understanding needed)
External economies of scale refer to the cost advantages that multiple firms in the same industry or region can collectively enjoy as the industry or region grows.
These cost savings are typically a result of factors beyond the control of any single firm, such as the availability of a skilled labor force, specialized suppliers, infrastructure development, or a supportive business environment.
External economies of scale benefit all firms in a particular industry or location, and individual firms do not have direct control over them.
What is profit maximisation and how can it be identified on a graph?
Profit maximization occurs when a firm or producer selects the level of output where its economic profit is the highest. Economic profit is calculated as total revenue minus total cost (including both explicit and implicit costs). The condition for profit maximization in the short run is as follows:
MR = MC: In the short run, a profit-maximizing firm produces the quantity of output where marginal revenue (MR) equals marginal cost (MC). In other words, the firm should continue producing as long as the additional revenue generated from selling one more unit of output is greater than or equal to the additional cost of producing that unit.
In the long run, under perfect competition, the condition for profit maximization is slightly different:
P = MR = MC: In the long run, in a perfectly competitive market, firms produce where the price (P) equals both marginal revenue (MR) and marginal cost (MC). This ensures not only profit maximization but also that firms do not enter or exit the industry in the long run.
What is normal profit?
Normal Profit: Normal profit is the minimum level of profit required to keep a firm in the industry. It is the profit that covers all explicit and implicit costs of production but provides no extra income above those costs. In economic terms, normal profit is when Total Revenue (TR) equals Total Cost (TC), including the opportunity cost of the resources used.
