The Measurement And Importance Of Profit Flashcards
What are costs?
Costs is the expenditure a firm makes as part of its trading
What are fixed costs?
Fixed costs are costs that do not alter when the business alters its level of output. e.g rent, interest charges
What are variable costs?
Variable costs are costs that alter as the firms level of output alters. E.g raw materials, energy used in production.
Variable costs are per unit
What is the equation for total variable costs?
TVC= VC* Q
Why will the like against TVC and output on a graph become less steep at higher levels of output?
When firms buy large quantities they benefit from purchasing economies of scale/bulk buying discounts which reduces the variable costs per unit
What are semi- variable costs?
Semi variable costs are costs that have fixed and variable elements e.g transport: renting vehicles and insurance is fixed but petrol and drivers wages are variable and increase as more products are transported
What are direct costs?
Direct costs are costs that can be attributed to the production of a particular product and vary directly with the level of output- rent - variable costs per
What are direct costs?
Direct costs are costs that can be attributed to the production of a particular product and vary directly with the level of output- rent - variable costs
What are indirect costs?
Indirect costs are a cost that is not directly attributable to a product. They are usually a fixed cost- like lighting. They can sometimes be variable costs e.g stamps used by a mail order firm. Indirect costs are also called overheads
Why is it important for a business to know their total costs?
-it helps with pricing decisions as price will usually be above cost
-it helps with output decisions as if FC are high like expensive machinery than a higher output spreads this cost over more units meaning FC per unit are lower
-it helps managers decide wether or not to enter a market. If customers are only willing to pay a certain price and costs are greater than that then it isn’t worth while entering the market( or lets firms know they need to lower costs )
-it can highlight problems which managers can try to solve
What is revenue?
Revenue is the total value of sales made within a trading period
What is the equation for revenue?
Revenue= price* quantity sold
How can a firm increase revenue?
-increase price - but products will need to differentiated to improve quality to give people a reason to pay that higher price.Sales output may low due to a high price but this lowers production costs
-reduce price- low price of skates promotion if price elastic demand
-increase quantity sold
What is the equation for profit?
Profit= total revenue- total costs
What do a firms profits depend upon?
A firms profits depend on:
-profit margin- the profit made on one item
-quantity sold: higher quantity of sales equals more profit unless price is lowered to achieve this and it isn’t price elastic demand
Why are profits important?
-provides a return for investors/ owners
- a profitable firm attracts customers: the public may believe the firms products are more desirable since they sell well. If the customer is a business they may believe more willing to make long term commitment to the firm
-easier to attract investors and persuade banks to lend
-it finances growth
- a highly profitable firm is more valuable meaning the owners could sell it for large sums
-suppliers may believe willing to give trade credit to profitable firms
