Revenues, costs and profits

Question 1

What are receipts?

Answer 1

Just a document that proof a financial transaction

Question 2

What’s Total Revenue (TR)?

Answer 2

Total receipts of money received from the sale of any given level of output
TR = Quantity sold (Q) x Avg Price (P)
TR = Q x P

Question 3

What’s Average Revenue (AR)?

Answer 3

Average receipt per unit sold
Average price of one sale
AR=TR/Q

Curve slopes down, as its the more sold, the less for
Represents Demand curve
AR curve = D curve

Question 4

What’s Marginal Revenue (MR)?

Answer 4

The receipts of selling an extra init of output
The difference between selling a good at a set price vans different price with 1 output
MR = TR(x) - TR(x-1)
MR=△TR/Q

Curve slopes down at double rate of AR
As each unit extra is sold for a bit less than the last Q

Question 5

How does price elasticity change when TR changes?

Answer 5

When TR increases, there’s a smaller price fall and a bigger increase in demand
So demand is elastic

When TR decreases, there’s a bigger price fall and a smaller increase in demand
So demand is inelastic

Question 6

What’s the short run?

Answer 6

Period of time when at least one factor of production can’t be varied for supply
E.g factory can’t expand capital in short run

Question 7

What’s the long run?

Answer 7

All factor inputs are variable
existing technologies don’t change

Question 8

What’s the very long run?

Answer 8

The state of technology can change

Question 9

What’s the law of diminishing returns?

Answer 9

When more units of a variable input are added to a fixed input, after a certain point, the marginal output of each new unit declines
- so makes AC and MC more expensive for the next unit of output

Only occurs in the short run
Makes MC and AC curve

Question 10

What’s total product?

Answer 10

Quantity of products produced by a given number of inputs over a period of time
Expressed in physical terms

Total product rises the highest, and decreases late when law of diminishing returns makes output decrease

Question 11

What’s average product?

Answer 11

The quantity of output per unit of input
E.g 1000 workers producing 30000 cars is 30 cars per year, per worker

Curve goes up, but then decreases as diminishing average returns hits

Question 12

What’s marginal product?

Answer 12

The addition of output produced by 1 extra unit of output
E.g an extra worker is employed and company produce 4 more cars, so marginal product is 4 cars

Rises, but falls early due to less product made per worker due to diminishing marginal returns

Question 13

What’s increasing returns to scale?

Answer 13

When firm increases inputs, but output proportionately increases by even more
E.g doubling input leads to triple output

Question 14

What’s constant returns to scale?

Answer 14

When firm increases inputs, but output proportionately increases by the same
E.g doubling input leads to double output

Question 15

What’s decreasing returns to scale?

Answer 15

When firm increases inputs, but output proportionately increases by less
E.g doubling input leads to 1.5x output

Question 16

What’s an imputed cost?

Answer 16

Opportunity cost of using a resource that they own instead of selling or renting it
E.g capital depreciates over time, so the economics cost will be the value when brought now

Question 17

What’s Total cost (TC)?

Answer 17

The total cost of producing a given level of output
Always rises
TC = TVC + TFC (short run)
TC = TVC (long run)

Curve increases, slows down increasing, them speeds back up due to diminishing returns

Question 18

What’s Average costs (AC)?

Answer 18

The total cost of production divided by the level of output
Cost of one output
AC=TC/Q
AC = AVC + AFC

Curve decreases due to efficiency, then rises due to diminishing marginal returns

Question 19

What’s marginal costs (MC)?

Answer 19

Cost of producing an extra unit of output
MC=△TC/△Q

Curve decreases due to efficiency, then rises due to diminishing marginal returns

Question 20

What is LRAC?

Answer 20

LRAC curve slopes down due to economies of scale
Then hits constant returns of scale
Then hits diseconomies of scale and rises back up

Looks like a massive SRAC
You can draw small SRAC’s on the LRAC curve
- they are tangential to LRAC and stay inside (above)
The LRAC Curve is only a boundary as it represents the min level of avg costs attainable

Question 21

Where’s the minimum efficient scale (MES) of production?

Answer 21

When economies of scale meets constant rates to scale on the LRAC curve

Question 22

What are internal economies of scale?

Answer 22

Economies of scale which arise from a growth in the scale of production within a firm
Movement along LRAC curve

Different types:
- Technical economies of scale (use of technology)
-Managerial economies of scale (specialisation leads to greater efficiency)
- Purchasing economies of scale (buying in bulk raw materials)
- Marketing economies of scale (costs of advertising per unit decreases, so adverts work out cheap for big firms)
- Financial economies of scale (easier to raise finance like borrow with big firm)

Question 23

What are external economies of scale?

Answer 23

Growth of a particular industry that the firm operates in
This decreases costs of production for the firm as a whole
Shifts LRAC down

Question 24

What are diseconomies of scale?

Answer 24

The end of the LRAC curve
Mainly due to management problems

Question 25

What is the break-even point?

Answer 25

Where TR=TC
So no profit or loss is made
Different to normal profit, as break-even point doesn’t count opportunity cost

Question 26

What’s normal profit?

Answer 26

Where Total Revenue = Total costs including opportunity costs
So profits may be made, but not much and only enough for the firm to operate in the long run
It’s where AC=AR
Seen as no profit economically

Question 27

What’s abnormal profit?

Answer 27

(Pure profit, economic profit or supernormal profit)
The profit above and beyond normal profit
=profit made - normal profit
Exists where AR > AC

subnormal profits is when abnormal is negative

Question 28

Where’s the short run shut down point?

Answer 28

Where MC = MR = AVC
So where profit maximisation = AVC
So the max profit made only makes up variable costs
Any lower than this, the firm has to shut down