Theme 3:3.3- Revenues, costs and profits

Question 1

what is revenue?

Answer 1

the income that a firm receives from the sale of a good or service to its customers.

Question 2

formula for total revenue.

Answer 2

price x quantity sold

Question 3

formula for average revenue.

Answer 3

total revenue/quantity

Question 4

formula for marginal revenue.

Answer 4

change in total revenue/change in total quantity

Question 5

definition of average revenue.

Answer 5

income for each unit sold.(price)

Question 6

define marginal revenue.

Answer 6

income from selling an additional unit of output(difference between total revenue at diff levels of output)

Question 7

why is AR=MR=D for price takers ?

Answer 7

they accept the ruling market price and will sell each unit at the same price.

Question 8

why is the AR curve downward sloping for price makers?

Answer 8

because price makers have some pricing power

Question 9

what are fixed costs and give an example?

Answer 9

costs which are paid regardless of output .e.g. rent, machinery

Question 10

what are variable costs and give an example?

Answer 10

costs which change as output increases e.g. raw materials, wages, delivery

Question 11

what is the difference between short run costs and long run costs?

Answer 11

in the short run at least one FOP is fixed(usually land, capital)whereas in the long run all FOP are variable

Question 12

total cost formula.

Answer 12

total cost=total fixed cost+total variable cost

Question 13

average fixed cost formula.

Answer 13

average fixed cost= total fixed cost/output

Question 14

average variable costs formula.

Answer 14

average variable costs= total variable cost/output

Question 15

average total cost formula.

Answer 15

average total cost=total cost/output

Question 16

marginal cost formula.

Answer 16

marginal total cost=change in total cost/change in output

Question 17

what is the minimum efficient scale(MES) and what does is equal?

Answer 17

the minimum output where production is most efficient and it is equal to productive efficiency

Question 18

when does productive efficiency occur?

Answer 18

when production occurs at the lowest average cost (lowest point on AC curve)

Question 19

what are economies of scale?

Answer 19

when long run average costs reduce as output increases

Question 20

what are the internal economies of scale?

Answer 20

Risk bearing
Financial-cheaper loans
Managerial-bring expertise
Technical
Marketing-buying ads in bulk
Purchasing

Question 21

what are the external economies of scale?

Answer 21

-better transport/infrastructure
-R&D firms move closer
-Suppliers move closer
-being close to similar businesses who can work together

Question 22

define diseconmies of scale.

Answer 22

when average costs increase as firms grow too big and as output increases

Question 23

what is the reason why diseconomies of scale occur?(3C’s and M)

Answer 23

control-as businesses get larger managers job is harder and workers begin to slack off cos they know they aren’t being watched

communication-messages get diluted from the top to the bottom

coordination-coordination is hard as diff parts of business have different aims.

motivation-workers may feel inferior and irrelevant in a big firm and believe they don’t have a purpose to work hard

Question 24

define normal profit.

Answer 24

the minimum level of profit required to keep the FoP currently in use in the long run

Question 25

define supernormal profit.

Answer 25

any profit that is in excess of normal profit

Question 26

why is normal cost included in the average costs of a business?

Answer 26

because it represents the opportunity cost of capital invested in a business

Question 27

when should a firm continue production?

Answer 27

when AR>=AVC

Question 28

when should a firm stop production?

Answer 28

when AVC>AR

Question 29

where is the point of profit maximisation on the graph?

Answer 29

when MR=MC

Question 30

Define subnormal profit

Answer 30

When a loss is made as it is below normal profit AVC>AR

Question 31

draw a SR shut down point in perefct comp

Question 32

draw a SR shut down point monopolistic comp/the rest of the markets

Question 33

draw a LR production continuation diagram for perfect comp

Question 34

draw a LR production continuation diagram for monopolistic comp