Theme 3 - Revenues, costs, profits

Question 1

What is the difference between total revenue and average revenue?
Include formulas

Answer 1

Total revenue is the total amount made from all units sold whereas average is how much revenue is made per unit sold
TR = quantity x price
AR = TR/Q = P

Question 2

What is meant by marginal revenue?

Answer 2

Marginal revenue is how much additional revenue is made for every extra unit sold by a firm.

Question 3

What is the marginal revenue formula?

Answer 3

Change in TR / Change in quantity

Question 4

What is the relationship between total revenue and marginal revenue?

Answer 4

If TR begins to decrease then MR will become negative

Question 5

Describe the TR curve

Answer 5

The graph is showed by an upside down ‘U’. The sloping upwards indicates total revenue being positive and the graph sloping downwards is showing total revenue to be negative. At the highest point, MR is maximised.

Question 6

How does elasticities of demand impact Total revenue to a firm?

Answer 6

When demand is inelastic, an increase in price will increase TR as the demand will fall but by less than price but when demand is elastic, an increase in prices will decrease TR because demand will fall by more than the price.

Question 7

How are elasticities shown on a d=ar curve?

Answer 7

At the top of the curve, the demand is said to be more elastic because any changes in price will create bigger responses and at the bottom of the demand curve, any changes in price will have less of an impact which causes demand to be more inelastic

Question 8

What is known as revenue maximisation?

Answer 8

This is the point where a business finds the highest level of revenue that they can make
TR is maximised when MR is equal to 0

Question 9

What is known as the law of diminishing returns?

Answer 9

This is when in the short-run, at least one FOP is fixed so if we increase labour, productivity will increase -specialization- but, there will be a point where adding labour will become useless as they haven’t got enough capital to allow productivity to remain high so costs will increase and productivity will fall

Question 10

What is the rule that allows TR to increase - as shown on the TR curve.

Answer 10

As long as MR is higher than AR, TR can increase but, as soon as MR goes below AR, TR will begin falling down

Question 11

The difference between the short-run and long-run…

Answer 11

The short run shows that at least one factor of production is fixed whereas in the long run, all factors if production are variable.

Question 12

What is the total costs formula?

Answer 12

Total costs = variable costs + fixed costs

Question 13

What is the average fixed costs formula? Describe the graph…

Answer 13

Total fixed costs / quantity.
The graph shows that as quantity increases, the AFC falls because when you increase the quantity, the numbers become smaller. The graph will eventually plateau as values are so small that they become spread across a large number of units

Question 14

What is meant by marginal cost and what is the formula?

Answer 14

The additional cost of selling one extra unit.
MC = change in total costs/changes in quantity

Question 15

What type of relationship does productivity have with marginal cost?

Answer 15

An increase in productivity will lead to a decrease in marginal cost

Question 16

What is the average variable cost formula?

Answer 16

AVC = total variable costs / quantity..
When MC is higher than AVC then AVC will increase and vice versa.

Question 17

What is the average total cost formua?

Answer 17

ATC = Total costs / quantity

Question 18

What does a long run average cost curve look like?

Answer 18

It looks like a ‘u’ shape and shows that overtime when firms expand their business to increase output in the long run, more short run diagrams are derived which creates a large long run diagram

Question 19

What is internal economies of scale?

Answer 19

Reduces a firms costs when output from production increases

Question 20

What are purchasing economies?

Answer 20

Bulk buying drives costs down shown by LRAC curve

Question 21

What are technical economies?

Answer 21

Investing in high tech will lower a firms long run average costs. Only large firms can exploit this

Question 22

What are managerial economies?

Answer 22

When firms expand, they can hire more workers to manage more departments

Question 23

What are marketing economies?

Answer 23

Large firms can spread marketing costs over a large number of units

Question 24

What are financial economies?

Answer 24

Larger firms benefit from lower IR because banks consider them as less risky

Question 25

What are risk-bearing economies?

Answer 25

Firms can use EOS to gain profit and diversify into new sectors

Question 26

3 Negatives of economies of scale?

Answer 26

Alienation - bored of their job, lack of motivation, fall in productivity
Bureaucracy - Expansion means more papers to fill out
Communication - hard to communicate around organisation structure

Question 27

What is the minimum efficient scale?

Answer 27

When firms reach its lowest LRAC

Question 28

What is external economies of scale?

Answer 28

When an industry as a whole expands, a company will benefit from lower, long-run average costs

Question 29

What are the 4 types of efficiencies?

Answer 29

• productivity, allocative, X-efficiency and dynamic.

Question 30

What is productive efficiency?

Answer 30

When AC is at its lowest, when AC=MC

Question 31

What is allocative efficiencies?

Answer 31

When AC = price (AR) = demand

Question 32

What is X-efficiency?

Answer 32

When, for a given level of output, costs are above the AC curve

Question 33

What is dynamic efficiency?

Answer 33

Changing technology increases a firms output potential over time but a firm needs supernormal profit

Question 34

What are the 3 types of profit?

Answer 34

• SNP TR>TC
• Normal - TR=TC
• Loss - TR < TC

Question 35

What is the different between a supernormal profit diagram and losses diagram?

Answer 35

This is when the average costs diagram is higher than the AR diagram showing the business making a loss

Question 36

What happens to MR and AR when revenue increases or decreases

Answer 36

When revenue increases, the MR and AR curve shifts outwards and when revenue falls, MR and AR falls downwards

Question 37

What happens to MC and AC when variable costs increase or decrease

Answer 37

When variable costs rise, MC and AC will shift to the left and when variable costs fall, MC and AC will shift to the right

Question 38

What is a short-run shut down point?

Answer 38

This is when a business is making a loss in the short run which forces them to leave them to leave the market. This is typically when ATC is greater than AR