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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
Q

Why does the AFC curve fall over time

A

the cost stays the same but output increases so the proportion of the cost is smaller

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26
Q

why is the ATC a U curved

A

costs fall initially because resources are used more efficiently, until resources are overused and efficiency falls so costs rise

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27
Q

Why is AVC a U curved that increases with output

A

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

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28
Q

Where does MC always cut the AC curve

A

lowest point

29
Q

What is the relationship between MC and AC

A

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
Q

Why are LRAC curves U shaped

A

Economies and diseconomies of scale

31
Q

Why do firms operate on a SRAC

A

firms have at least one fixed factor of production

32
Q

How can firms move along the SRAC

A

by increasing variable factors of production to increase output

33
Q

How can firms shift the SRAC

A

When a firm changes all of their factors of production, this is only possible in the long run

34
Q

What does the LRAC show

A

The minimum possible average cost at each level of output

35
Q

How can firms operate on the LRAC

A

by utilising all factors of production to reduce costs to the minimum level

36
Q

what does SRAC1 experience

A

economies of scale

37
Q

what does SRAC3 experience

A

constant returns to scale

38
Q

what does SRAC5 experience

A

diseconomies of scale

39
Q

What causes movement along the LRAC

A

Changes in output changing the AC due to internal economies and diseconomies of scale

40
Q

What causes LRAC to shift

A

External economies and diseconomies of scale like taxes or new tech because this changes the average cost at a given level of output

41
Q

What is the minimum efficient scale

A

The lowest level of output at which the minimum AC can be achieved, higher AFC higher the MES

42
Q

economies of scale

A

advantages of large scale production that allow lower average costs, so experience increasing returns to scale

43
Q

increasing returns to scale

A

Increase in inputs will lead to a greater increase in output

44
Q

constant returns to scale

A

increase in inputs leads to a proportional increase in output

45
Q

decreasing returns to scale

A

Increase in inputs leads to a smaller increase in output

46
Q

diseconomies of scale

A

disadvantages from being a large business that increases costs and causes decreasing returns to scale

47
Q

Internal economies of scale

A

Advantage that a firm can enjoy because of the growth of the firm

48
Q

What are all the types of internal economies of scale

A

Technical
Purchasing
Managerial
Financial
Risk Bearing
Marketing

49
Q

Technical economies of scale

A
  • specialised workers and machines are more efficient
  • Production line methods, balanced teams of machines
  • Increasing dimensions, storage or factories
  • R and D
50
Q

Explain how increasing dimensions is an economies of scale

A

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
Q

Purchasing Economies of scale

A
  • 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
Q

Financial Economies of Scale

A
  • 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
Q

Managerial Economies of scale

A
  • 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
Q

Risk Bearing Economies of Scale

A
  • 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
Q

Marketing Economies of Scale

A
  • 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
Q

External economies of scale

A

Advantage which arises from a growth in the industry not the firm

57
Q

examples of external economies of scale

A
  • 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
Q

Internal Diseconomies of Scale

A
  • 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
Q

External Diseconomies of Scale

A
  • 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
Q

What creates larger economies of scale

A

Higher fixed costs as these stay the same when output increases

61
Q

What is the other profit maximisation condition

A

When TR and TC are furthest apart possible

62
Q

Normal profit

A

When a firm covers its costs, sufficient revenue to keep all factors of production working, AR=AC or TR=TC

63
Q

What is it called when profit is greater than normal

A

supernormal

64
Q

Under what condition should a loss making firm continue production

A

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
Q

Under what condition should a loss making firm shut down immediately

A

AVC > AR as it is costing more to produce a good than the revenue the good is bringing in

66
Q

When may a AVC < AR firm making a loss need to shut down

A

When their fixed costs increase

67
Q

What is the short run shut down point and why

A

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
Q

What do firms have to make in the long run

A

At least normal profit

THEME 3 (19 decks)

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