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THEME 3 > Revenues, Costs and Profits > Flashcards

Revenues, Costs and Profits Flashcards

1
Q

What is TR and the calculation

A

total revenue and is quantity x price

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2
Q

what is AR calculation

A

is equal to demand so = total revenue / output

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3
Q

what is MR calculation

A

change in total revenue / change in output

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4
Q

Why will some firms have a perfectly elastic (horizontal) demand curve

A

They are in perfect competition so have no price setting powers

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5
Q

why do firms have a downward sloping demand curve

A

price decreases as output increases this is imperfect competition so firms have some price setting powers

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6
Q

If Marginal revenue is positive what happens to elasticity of the demand curve

A

It is elastic

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7
Q

If MR is negative what happens to elasticity of the demand curve

A

It is inelastic

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8
Q

If MR=0 what happens to the demand curve

A

It is unitary elastic

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9
Q

Why does MR = AR in perfect competition

A

demand is perfectly elastic so price is the same no matter the output level, cost of producing another is the same every time as all goods are the same price

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10
Q

Why is TR curved in imperfect competition

A

At first total revenue rises with output when marginal revenue is positive, but when marginal revenue is negative so the cost of producing another is more than the revenue then total revenue will begin to fall as output rises

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11
Q

What is always fixed in the short run

A

At least one factor of production so some costs

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12
Q

What does the cost of production consist of

A
  • monetary cost of factors of production having to be paid for
  • opportunity cost of the factor of production and moneys next best use
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13
Q

What happens to costs in the long run

A

All costs are variable

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14
Q

TC what is it and formula

A

Total cost, cost at a given level of output

Fixed + variable

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15
Q

TFC what is it

A

Total fixed cost, don’t change with output

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16
Q

give examples of fixed costs

A

machinery or rent or salary

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17
Q

TVC what is it

A

Total variable cost, change directly with output

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18
Q

examples of variable costs

A

raw materials

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19
Q

ATC,AFC,AVC formula

A

average costs

formula is always / output

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20
Q

MC what is it and formula

A

marginal cost, extra cost of producing another unit

change in total cost / change in output

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21
Q

What is the law of diminishing returns

A

If one variable factor of production is increased while other factors stay fixed, marginal returns from the variable factor will begin to decrease

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22
Q

What is the other name for the law of diminishing returns

A

diminishing marginal productivity

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23
Q

Explain the law of diminishing returns in context

A
  • Labour as a variable factor can be changed by employing more workers
  • To begin with this may increase productivity and efficiency as more workers operate machines
  • Eventually the firm will employ too many workers so there isnt space on any more machines and workers getting each others way which decreases productivity and thus decreases output.
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24
Q

What is the relationship between marginal returns and marginal cost and why does this happen

A

inverse because less additional output from each unit of input means costs are higher

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25
Why does the AFC curve fall over time
the cost stays the same but output increases so the proportion of the cost is smaller
26
why is the ATC a U curved
costs fall initially because resources are used more efficiently, until resources are overused and efficiency falls so costs rise
27
Why is AVC a U curved that increases with output
The same reason as ATC but it increases with output because AFC stays the same throughout so AVC holds a larger proportion of the costs as output increases
28
Where does MC always cut the AC curve
lowest point
29
What is the relationship between MC and AC
If MC is below AC AC will begin to fall because the cost of producing another is below the average cost, the inverse is also relevant
30
Why are LRAC curves U shaped
Economies and diseconomies of scale
31
Why do firms operate on a SRAC
firms have at least one fixed factor of production
32
How can firms move along the SRAC
by increasing variable factors of production to increase output
33
How can firms shift the SRAC
When a firm changes all of their factors of production, this is only possible in the long run
34
What does the LRAC show
The minimum possible average cost at each level of output
35
How can firms operate on the LRAC
by utilising all factors of production to reduce costs to the minimum level
36
what does SRAC1 experience
economies of scale
37
what does SRAC3 experience
constant returns to scale
38
what does SRAC5 experience
diseconomies of scale
39
What causes movement along the LRAC
Changes in output changing the AC due to internal economies and diseconomies of scale
40
What causes LRAC to shift
External economies and diseconomies of scale like taxes or new tech because this changes the average cost at a given level of output
41
What is the minimum efficient scale
The lowest level of output at which the minimum AC can be achieved, higher AFC higher the MES
42
economies of scale
advantages of large scale production that allow lower average costs, so experience increasing returns to scale
43
increasing returns to scale
Increase in inputs will lead to a greater increase in output
44
constant returns to scale
increase in inputs leads to a proportional increase in output
45
decreasing returns to scale
Increase in inputs leads to a smaller increase in output
46
diseconomies of scale
disadvantages from being a large business that increases costs and causes decreasing returns to scale
47
Internal economies of scale
Advantage that a firm can enjoy because of the growth of the firm
48
What are all the types of internal economies of scale
Technical Purchasing Managerial Financial Risk Bearing Marketing
49
Technical economies of scale
- specialised workers and machines are more efficient - Production line methods, balanced teams of machines - Increasing dimensions, storage or factories - R and D
50
Explain how increasing dimensions is an economies of scale
If you build a new ware house and double the size of the walls, this will quadruple the area and make the volume 8 times greater, you get more storage for each pound spent
51
Purchasing Economies of scale
- Larger firms need larger quantities of raw materials so can negotiate better deals - Large firms will also be very important to the supplier so the firm can bargain the cost even lower
52
Financial Economies of Scale
- Larger firms can borrow at lower rates and with more ease as they are seen as less risky to banks - More security as they have many more assets to sell
53
Managerial Economies of scale
- Larger firms can employ specialist managers who have expertise in that area so that area will be more reliable and efficient - reduces management cost per unit as management doesn't increase directly with production
54
Risk Bearing Economies of Scale
- Large firms will diversify into different markets or products so that if one area fails then the whole business won't collapse - This means they can take more risks as failure can be absorbed by other areas of the firm
55
Marketing Economies of Scale
- Advertising is a fixed cost so the more they produce the less cost per unit for advertising - Larger firms also benefit from brand awareness which makes their advertising more successful or eliminates the need for advertising
56
External economies of scale
Advantage which arises from a growth in the industry not the firm
57
examples of external economies of scale
- Local schools and colleges develop courses providing people with qualifications to work in the firm - Large companies may collect in an area making recruiting costs lower and other costs lower like supply - Large company in an area can improve infrastructure - corp tax reduction
58
Internal Diseconomies of Scale
- Wastage and loss can increase as materials may seem in plentiful supply - communication between areas of firm and between management levels and ownership may worsen - More difficult to coordinate al aspects of the business - Workers may feel alienated and like their work doesn't matter in a large firm so become less efficient - Increase transport costs
59
External Diseconomies of Scale
- whole industry becomes bugger price of raw materials may increase due to demand increasing - buy large amounts of materials may mean they have to be bought from different suppliers which doesn't make them cheaper per unit
60
What creates larger economies of scale
Higher fixed costs as these stay the same when output increases
61
What is the other profit maximisation condition
When TR and TC are furthest apart possible
62
Normal profit
When a firm covers its costs, sufficient revenue to keep all factors of production working, AR=AC or TR=TC
63
What is it called when profit is greater than normal
supernormal
64
Under what condition should a loss making firm continue production
AVC < AR as each good is creating more revenue than it cost to make so over time they can pay off their fixed costs and begin to reduce the loss size
65
Under what condition should a loss making firm shut down immediately
AVC > AR as it is costing more to produce a good than the revenue the good is bringing in
66
When may a AVC < AR firm making a loss need to shut down
When their fixed costs increase
67
What is the short run shut down point and why
AVC = AR because this means they aren't reducing the size of their loss their revenue needs to be covering their variable costs in the short run
68
What do firms have to make in the long run
At least normal profit

THEME 3 (19 decks)

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