Revenues, Costs and Profits Flashcards

Question

Relationship between AP and AVC

Answer 1

Average Product Average Variable Costs - As AP rises AVC falls, As AVC rises AP falls

Answer 2

EOS - When an increase in scale of production results in large increase in output, causing a fall in LR Average Costs

Answer 3

Internal - LR Average Costs of production decrease as firms size increases External - When LR Average Costs of Production decrease as whole industry / market a firm is in size increases e.g. AI

Answer 4

- Technical EOS --> e.g. larger warehouse, larger shop able to hold much more -->Larger companies will own the machine as opposed to renting them - Marketing EOS --> cost of advertising spread over larger output / consumers e.g. Virgin ads Media, plane, gym in one - Commercial EOS --> bulk-buying e.g. Walmart , P↓, Profit↑ - Managerial EOS --> Larger firms ↑Efficiency, highly skilled, specialised managers - Financial EOS--> more collateral to borrow against, lower interest rates due to lower risk --> - If a larger company needs liquidation it can sell shares. --> contributes to lower AC - Risk-bearing EOS --> spread risk through diversification. e.g. Mars owning chocolates, pet food, rice.

Answer 5

- Firm increases range of goods or markets to reduce risk

Answer 6

- DOS --> Increase in scale of production results in reduced increase, or decrease, of output --> ↑LRAC

Answer 7

- X-inefficiency --> lack of competition for large firm means costs allowed to rise --> little incentive for firm to minimise costs - Poor communication --> communication between manager / owners and workers become complex e.g. ↑Bureaucracy --> delays in info --> productivity ↓ - Principles-Agent Problem --> divorce from ownership + control (different gals between CEO [long-run] + managers [short-run]) - Demotivation --> large business often impersonal, ↓Efficiency of workers --> Productivity ↓ - Poor co-ordination --> e.g. different timezones, cultures countries --> productivity ↓ --> AC ↑

Answer 8

- University programs --> e.g. partnership between Standford + Apple (benfits both) - Infrastructure --> Gov providing infrastructures / subsidies - Popularity e.g. AI popular

Answer 9

- Higher Rent in certain areas - As Industry grows D for materials / workers / machinery increases

Answer 10

- TR-TC - reward for risk taking

Answer 11

- MR=MC or Marginal Profit = 0 - When a firm cannot increase profits further --> also be the output where TR-TC is largest

Answer 12

New Price - Original Price (P2-P1) / Original Price (P1) x 100

Answer 13

%△Qd / %△P - Inelastic = Less than 1 Elastic = Greater than 1 Perfectly / Unitary Elastic = 1

Answer 14

- Normal Profit , AR = AC - minimum money required for a firm to remain in business - Supernormal profits, AR>AC - Loses , AR

Answer 15

Econ Revenues - Economic (Implicit) Costs - Implicit Costs e.g. Opportunity costs Accounting Revenues - Explicit Costs - Explicit costs e.g. wages

Answer 16

MC= AC (Marginal Costs = Average Costs) ( J curve = top U curve ) --> Minimum point on AC, Lowest Cost per unit

Answer 17

P=MC (Price = Marginal Costs [J curve] ) --> Price charged maximises social welfare, taking consumer + Producer welfare into account

Answer 18

TR=TC or AR=AC --> Return is built into cost curve, just enough profit to keep business going --> represents Oppertunity Cost

Answer 19

MR = MC Marginal Revenue = Marginal Costs --> Marginal Profit = 0 --> Vertical difference between TR and TC is maximum

Answer 20

AC= AR TR=TC --> highest level of output at normal profits

Answer 21

MR= 0 --> Maximum total Revenue Selling another unit adds same to TR as amount lost from units being sold at lower price

Answer 22

AR=MR - Perfectly elastic demand --> TR is straight line through origin AR + MR horizontal PED infinite

Answer 23

- AR > MR - AR downwards sloping MR at twice gradient of AR (e.g. MR half of AR) --> firm has price-setting power

Answer 24

AR=AC --> firm covers costs and makes only normal profits

Answer 25

AR=AVC --> Firm only covers AVC, makes loss - If price above this but below AC, still a loss, but firm contributes to AFC so can carry on in SR

Answer 26

- Predatory Pricing --> illegal (CMA) When prices are set below AVC to drive competitors out - Limit pricing --> prices are set below the profit maximising price but not so low losses are made (lower prices a lot but not to make loses) - Pricing-meet the objectives --> Profit Max (MR=MC), Revenue Max (MR=0), Sales Max (AR=AC) (diagram) - Cost-plus or Mark-up pricing --> firm calculates AC and add mark-up to make profits (used in irl) - Price Wars

Answer 27

- Firms want to avoid Price wars --> Profit↓ Reasons for price wars: - Defend Market Shares (dif firm lowers price) - To drive weaker competitors out market - Existing firms defending market against new firm (prefatory pricing)

Answer 28

- Short-run - benefits consumers (P↓) harms shareholders (revenue↓) - Long-run - harms consumers (P↑ - Og firm puts P back, eliminates possible innovation) benefits shareholders - Possible price wars - Anti-competitive behaviour (Predatory illegal CMA)

Answer 29

Graph - Q=P where AVC = AR / D Evaluation pros - EOS↑ (than Profit Maximisation) - ↑ Brand awareness--> Circulation of products cons - Dividends ↓ - Profits ↓Dynamic Efficiency

Answer 30

- Profit Maximisation --> Q = (MR=MC) P= AR - Revenue Maximisation --> MR=0 - Sales volume Maximisation --> AC=AR - Satisficing --> Principle agent problem - Growth Maximisation --> ↑EOS - CSR (Corporate Social Responsibility) --> community work / Charities

Answer 31

graph - Q where MR (1/2 D) = 0 - P follow line up to D - MR=0 Assumption - Managers most interested in salary, boost revenue for company Evaluation pros - P↓ (Market share↑) --> EOS↑ (than Profit Maximisation) cons - Profit for shareholders↓ (than profit max.) - P↓ may be copied by other firms, Profits don't increase by much

Answer 32

- the output where LRAC first reach a minimum --> where internal EOS fully exploited