T3.2 - 3.3: Business Objectives, Revenues, Costs & Profit Flashcards
Business ethics
concerned with the social responsibility of management towards the firm’s major stakeholders, the environment and society in general.
Competitive advantage
When a company has an advantage over another in selling a product or
service.
Corporate governance
Practices, principles and values that guide a firm and its activities.
Corporate social responsibility (CSR)
Happens when companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis.
Corporate strategy
A company’s aims in general, and the way it hopes to achieve them - strategic objective which supports the achievement of corporative aims.
Multinational
A company with subsidiaries or manufacturing bases in several countries.
Profit maximisation
Profit maximisation is an output when marginal revenue = marginal cost
MC=MR.
Revenue maximisation
Revenue maximisation is an output when marginal revenue = zero (MR=0).
Sales maximisation
Sales maximisation is achieving the highest level of output consistent with a firm making at least normal profit. The sales maximising equilibrium output is where AC=AR.
Satisficing
involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit.
Short-termism
When a business pursues the goal of maximising short-term profits because
of a fear of being taken over or having the stock market mark down the value. Makes it difficult for a business to follow longer-term objectives.
What is average revenue?
Average revenue is the total revenue divided by the quantity of output sold.
What is break-even output?
Break-even output is the level of production at which total revenue equals total costs, resulting in no profit or loss.
What is consumer surplus?
Consumer surplus is the difference between the total amount consumers are willing to pay for a good or service and the total amount they actually pay.
What is marginal revenue?
Marginal revenue is the revenue earned from selling the last unit of output.
What is revenue?
Revenue is the total income generated from the sale of goods or services.
What is total revenue?
Total revenue (TR) is found by multiplying price (P) by output (Q).
What is average total cost?
Average total cost is the total cost divided by the quantity of output.
What is average cost?
Average cost is the total cost divided by the quantity of output.
What is average fixed cost?
Average fixed cost is the total fixed cost divided by the quantity of output.
What is average variable cost?
Average variable cost is the total variable cost divided by the quantity of output.
What is capacity?
Capacity is the maximum amount that can be produced by a plant, company, or economy over a given period of time.
What does capital intensive mean?
Capital intensive refers to an industry or production process that requires a relatively large amount of capital compared to labor.
What are cost synergies?
Cost synergies are the cost savings that a buyer aims to achieve as a result of taking over or merging with another business.
What is cost-plus pricing?
Cost-plus pricing is where a firm fixes the price for its product by adding a fixed percentage profit margin to the average cost of production.
What are cost-reducing innovations?
Cost-reducing innovations allow businesses to make higher profits with a given level of demand.
What is diminishing marginal productivity?
Diminishing marginal productivity occurs when adding more of a variable factor to a fixed factor results in a decrease in the additional output produced.
What are fixed costs?
Fixed costs are business expenses that do not vary directly with the level of output in the short run.
What is the long run?
The long run is a period of time when all factors of production are variable and a business can change the scale of production.
What is marginal cost?
Marginal cost is the change in total costs from increasing output by one extra unit.
What is producer surplus?
Producer surplus is the difference between what producers are willing to supply a good for and the price they receive.
What is total cost?
Total cost is the sum of total fixed cost and total variable cost.
What is total fixed cost?
Total fixed cost is all fixed costs added together.
What is total variable cost?
Total variable cost is all variable costs added together.
What are variable costs?
Variable costs are business costs that vary directly with output.
What are constant returns to scale?
Constant returns to scale occur when long run average cost remains constant as output increases.
What are diseconomies of scale?
Diseconomies of scale occur when a business expands beyond the optimal size, leading to rising long run average costs.
What are economies of scale?
Economies of scale refer to falling long run average costs as output increases.
What are economies of scope?
Economies of scope occur when it is cheaper for a business to produce a broader range of products.
What is excess capacity?
Excess capacity is the difference between the current output of a business and the total amount it could produce.
What is the experience curve?
The experience curve refers to falling unit costs as production increases due to improved efficiency and skill.
What are external diseconomies of scale?
External diseconomies of scale occur when the growth of an industry leads to higher costs for businesses within that industry.
What are external economies of scale?
External economies of scale occur when the expansion of an industry leads to benefits for suppliers.
What are internal economies of scale?
Internal economies of scale are reductions in long run average cost from an expansion of the size of a business.
What is minimum efficient scale?
Minimum efficient scale corresponds to the lowest point on the long run average cost curve.
What is optimal plant size?
Optimal plant size is the size where costs are minimized and all economies of scale have been obtained.
What is the production function?
The production function describes the relationship between a firm’s output and the quantities of factor inputs it employs.
What are returns to scale?
Returns to scale describe how the output of a business responds to a change in factor inputs.
What is abnormal profit?
Abnormal profit is profit in excess of normal profit, often maintained in a monopolistic market due to barriers to entry.
What is equilibrium output?
Equilibrium output is the level of output where marginal cost equals marginal revenue.
What is marginal profit?
Marginal profit is the increase in profit from selling one more unit.
What is monopoly profit?
Monopoly profit occurs when a firm sets prices above the equilibrium price due to lack of competition.
What is normal profit?
Normal profit is the minimum reward necessary to keep an entrepreneur in their current industry.
Profit
The excess of revenue over expenses; or a positive return on an investment.
Profit margin
The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control their operating costs.
Profit maximisation
Profit maximization occurs when marginal cost = marginal revenue (MC=MR).
Profit per unit
Profit per unit (or the profit margin) = AR – ATC. In markets where demand is price inelastic, a business may be able to raise price well above average cost earning a higher profit margin on each unit sold. In more competitive markets,
profit margins will be lower because demand is price elastic i.e. consumers are price sensitive.
Retained profit
Profit retained by a business for its own use and which is not paid back to the company’s shareholders or paid in taxation to the government.
Shut down price
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable cost (P>AVC).
Supernormal profit
A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost (P>AC).
