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Theme 3 Business Behaviour And The Labour Market > Revenues, Costs And Profits > Flashcards

Revenues, Costs And Profits Flashcards

1
Q

What is total revenue also called

A

Turnover or sales revenue

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2
Q

What is total revenue

A

Total revenue (TR) is the amount the firm receives from all its sales over a certain period.

TR = price x quantity

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3
Q

How is total revenue calculated

A

TR = price x quantity

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4
Q

What is average revenue also known as

A

Revenue per unit

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5
Q

What is average revenue

A

Average revenue (AR) is how much people pay per unit (price) and also the demand curve.

AR = total revenue/quantity

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6
Q

How is average revenue calculated

A

AR = total revenue/quantity

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7
Q

What is marginal revenue

A

Marginal revenue (MR) is the revenue associated with each additional unit sold, ie the change in total revenue from selling one more unit. It is the gradient of the total revenue curve.

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8
Q

What do both the average revenue and marginal revenue curves tend to be like

A

Downwards sloping, (unless the firm is operating under conditions of perfect competition), and reflect the downward sloping demand curve and the need for firms to lower prices to increase sales.

Marginal revenue has a steeper gradient than average revenue curve and so MR crosses the y axis at a lower quantity.

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9
Q

The average revenue curve is also the firms ….

A

Demand curve this can be calculated by:

Average revenue = (P x Q)/Q

I think that’s the same as TR/Q

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10
Q

How is PED calculated

A

Percentage change in quantity demanded/percentage change in price.

Remember that economists ignore the negative sign when calculating PED.

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11
Q

What does it mean when PED is greater than one

A

It is said to be relatively price elastic

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12
Q

What does it mean when PED is less than 1

A

It’s relatively price inelastic.

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13
Q

How do the elasticity of demand change on the demand curve (AR and MR curves)

A

In the example of this page, the top half of the demand curve is relatively price elastic and the bottom half relatively price inelastic, although the curve is drawn as a straight line with constant gradient idk either.

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14
Q

How can we apply changing PEDs of the demand curve (AR) to work out what happens to total revenue

A

We can apply this information to work out what happens to total revenue when prices are changed on the elastic and inelastic parts of the average revenue curve.

On the elastic part of the demand curve, if prices fall 10% the firm sells proportionately more than the fall in price, so total revenue increases.

On the inelastic part of the demand curve, when firms raise prices by 20% it sees sales fall by only 10% and so although they are selling fewer goods, they are at a proportionately higher price and therefore total revenue increases.

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15
Q

In summary how does the PED of AR affect total revenue

A

In summary we can say that on the elastic part of the demand curve, if the firm lowers price then total revenue increases and if it raises prices then total revenue falls.

If we consider the inelastic part of the demand curve, if the firm lowers prices then it will witness a fall in revenue and if the firm raises then it will experience a rise in revenue.

This is worth noting when the kinked demand curve is considered later.

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16
Q

Look at the diagrams on page 15

A

Shows impacts of PED on TR diagrammatically

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17
Q

What does the total revenue curve look like

A

An n shape, symmetrical

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18
Q

What does it mean if you see a horizontal AR and MR

A

The firm is a price taker and operating under conditions of perfect competition.

In all other cases, AR and MR will be downward sloping and MR will be twice as steep as AR

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19
Q

When looking at costs/before we can draw a cost curve, what must we determine first

A

Which time period we are considering - short run or long run

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20
Q

What is the short run

A

This can be defined as a time period in which at least one factor of production (land, labour, capital or entrepreneurship) is fixed - it cannot be changed even if there is a change in demand. The length of time that this represents will vary for different firms. For example, a pizza delivery firm could probably double in size within a matter of days, but an oil exploration firm might take 20 years because of geological research and legal costs involved. The explanation of short run costs is the law of diminishing returns.

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21
Q

What is the long run

A

This is defined as a time period in which all factors of production are variable. The explanation of long run costs is economies and diseconomies of scale.

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22
Q

Define short run

A

A time period in which at least one factor of production is fixed.

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23
Q

Define long run

A

A time period when all factors of production are variable

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24
Q

What are the two types of cost

A

Fixed costs and variable costs

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25
Q

What are fixed costs

A

These costs do not change with output. Fixed costs can apply only when at least one factor of production (land, labour, capital and entrepreneurship) is fixed. This will be the case in the short run only. For example, an out of town supermarket has a fixed supply of available land in the short term. In the future, the supermarket may be able to buy more land adjacent to the site, showing that in the long run, all factors of production are variable. Fixed costs are also known as overheads.

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26
Q

Fixed costs are also known as …

A

Overheads

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27
Q

What are variable costs

A

These costs do change with output and can occur in both the short run and long run. An example might be a firms raw material costs, which will increase as the firm produces more products. If a car producer makes more card, it will use more steal.

28
Q

Define fixed costs

A

Costs that do not vary with output - these can occur in the short run only.

29
Q

Define variable costs

A

Costs that vary with output, such as raw material consumption in a manufacturing process.

30
Q

What are total costs

A

Total fixed costs and total variable costs are known as total costs.

31
Q

Define total costs

A

These will include all the rewards to the factors of production, ie wages (labour), rent (land), interest (capital), normal profit (entrepreneurship)

32
Q

What does AFC stand for

A

Average fixed cost

33
Q

How are average fixed costs calculated

A

AFC = fixed costs/outputs

34
Q

Why is AFC an ‘always falling curve’

A

The average fixed costs can never rise. As output increases, AFC will always continue to fall because the fixed cost is being spread across a greater output.

35
Q

What does AVC stand for

A

Average variable cost

36
Q

How are average variable costs calculated

A

AVC = variable costs/output

37
Q

What’s the average total cost

A

Average total cost (usually abbreviated to AC or ATC) is equal to AFC + AVC, or by dividing total cost by the quantity produced.

38
Q

Define average cost

A

Average cost per unit of output

39
Q

Define marginal cost

A

Change in total costs when one more unit of output is produced.

40
Q

What is marginal cost

A

Marginal cost (MC) is the change in total cost when one additional unit of output is produced. It is the gradient of the total cost curve, triangle TC/triangle Q - the change in total cost divided by one unit change in output,

41
Q

The marginal cost always goes through the minimum point of what and why

A

The marginal cost always goes through the minimum point of the AVC and ATC(AC) curves. This can be explained using some marginal analysis.

If we can imagine that the average height of a group of people is 6 feet and we add some people who are 5 feet tall, then the average height will fall. This is because the marginal height of the class, in other words the height of the next person added, is 5 feet, which is less than the average height. Therefore if the marginal unit is below the average unit, the average will fall. If the marginal height of the next person added was more than 6 feet, the average height would increase. The same applies to the cost of production. If the marginal cost is greater than the average cost, the average must be rising. The only time that the average is not falling or rising is when the marginal cost is equal to the average cost and the average has stopped falling and has yet to start rising.

42
Q

Why does the gap between the average total cost and average variable cost gets smaller as output rises

A

AC = AFC + AVC. So as output rises, AC is nearer in value go AVC because average fixed cost is always falling as output rises and AVC starts to rise because of the law of diminishing returns.

43
Q

Tell me about deriving the short run average cost curve

A

The average total cost and average variable cost curves slope downwards because of increasing returns to a fixed factor. In other words, as greater inputs are added to a fixed factor such as a shop of factory floor, the firm will increase output at a faster rate and therefore average costs will fall. However, beyond the lowest point of the AC and AVC, the firm begins to experience diminishing returns to a fixed factor and therefore, as more factors of production are added to a fixed factor, they start to add less than the last to total output and the AC and AVC start to increase. Making a U shape.

44
Q

In the long run, what are costs like

A

All costs are variable and average costs are explained by economies and diseconomies of scale,

The LRAC curve is u shape and as gradient is negative, it is economies of scale(left hand side) then at lowest point is the minimum efficient scale, then as gradient is positive, is diseconomies of scale.

45
Q

What are internal economies of scale to do with

A

Internal economies of scale are falling long run average costs associated with an increase in output for an individual firm

46
Q

Define economies of scale

A

A fall In long run average costs as output increases.

47
Q

List me the 5 types of internal economies of scale

A

Financial economies

Risk-bearing economies

Marketing economies

Managerial economies

Increased dimensions

48
Q

What are financial economies of scale

A

As a firm grows, it is better able to access loans at low cost. Banks will be more willing to lend as there is less risk associated with the transaction.

49
Q

What are risk bearing economies of scale

A

As the firm expands, it is better able to develop a range of products and a wider customer base to spread risk and minimise the impact of any downturn.

50
Q

What are marketing economies of scale

A

As a firm expands its product range, it is able to use any central brand marketing to advertise the range at little extra cost and therefore spread this across a wider range of goods and decrease long run average cost. For example, if Mars advertise its chocolate bars, it is also indirectly advertising its ice cream with no additional cost by developed brand awareness.

51
Q

What are managerial economies of scale

A

As a firm expands, it is in a position to employ specialist managers in finance, sales or operations and therefore increase productivity and decrease long run average costs.

52
Q

What are increased dimensions economies of scale

A

A haulage company, for example, is able to expand the quantities it carriers by doubling dimensions and therefore the costs, but in consequence it increases the volume eight fold. This is a factor contributing to increased globalisation as firms are better able to transport goods around the world at low cost.

53
Q

Economies of scale relate to what only

A

To the long run only: that is, when all factors are variable, in the short run, changes in costs are explained by the law of diminishing returns.

54
Q

What are external economies of scale

A

Internal economies of scale occur when an individual firm expands, whereas external economies of scale have an impact on the entire industry and therefore lower the long run average cost curve.

55
Q

Tell me examples of external economies of scale

A

An industry may benefit as a result of innovations produced by other firms and therefore all firms will see their average cost of production fall.

Retailers located close to each other are able to benefit from the development of new roads and transport links, which lower the long run average costs of all the firms.

A group of small businesses is able to share administrative and secretarial facilities and therefore enjoy lower long run costs per unit.

56
Q

Define diseconomies of scale

A

An increase in long run average costs as output increases. This is often associated with managerial difficulties.

57
Q

What are diseconomies of scale

A

A firm may experience diseconomies of scale if it grows too large and moves beyond its minimum efficient scale (lowest point on LRAS. diseconomies or scale may result from a breakdown in communication or other managerial difficulties and will lead to long run average costs increasing as output increases.

58
Q

Why would diseconomies of scale occur

A

This may occur when a firm merges with another or when a firm grows internally and management lacks the experience necessary to maintain managerial focus and control. Such expansion may also result in a lack of co ordination between departments within the firm, leading to greater levels of productive inefficiency, waste and an increase in long run average costs.

59
Q

Tell me about the relationship between the short run and long run average cost curves

A

The long run average cost curve is made up of many short run average cost curves joined together at their lowest points.

It is worth remembering that in the short run the firm is constrained by at least one factor of production being fixed, while in the long run all factors of production are variable, so at the end of one short run period the firm will be able to change all of its factors of production and in turn enter a new short run. All of these short runs make up the long run time period. It is for this reason that the LRAC is sometimes referred to as the envelope curve.

60
Q

What’s the difference between the short run and long run

A

In the short run at least one factor is fixed, but in the long run all factors are variable.

61
Q

Summarise fixed costs

A

Fixed costs do not change with output and therefore exist only in the short run, along with any variable cost. If fixed costs increase, there is no change in marginal cost because fixed costs do not change with output and marginal cost is the increase in costs when output changes. In the long run, all costs are variable.

62
Q

TC =

A

TC = TFC + TVC

63
Q

AC =

A

AC = TC/Q

64
Q

TR =

A

TR = P x Q

65
Q

AR =

A

AR = PQ/Q

Or just P or the demand curve.

Theme 3 Business Behaviour And The Labour Market (4 decks)

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