Topic 3: Revenues, Costs and Profits Flashcards
1
Q
What is total revenue?
A
The total amount of money a firm receives from its sales
2
Q
What is average revenue?
A
What a business receives on average from each sale
3
Q
What is the formula for average revenue?
A
Total revenue / Quantity or Price
4
Q
What is the formula for total revenue?
A
Price x quantity
5
Q
What is marginal revenue?
A
The extra revenue a firm makes from selling one extra unit
6
Q
What happens to total revenue when marginal revenue is positive?
A
Total revenue increases with quantity
7
Q
What happens to total revenue when marginal revenue is 0?
A
Total revenue doesn’t change
8
Q
What happens to total revenue when marginal revenue is negative?
A
Total revenue decreases with quantity
9
Q
What is the formula for marginal revenue?
A
Change in total revenue / change in quantity
10
Q
What should the marginal revenue curve must have? (Give 3 things)
A
- start at the same price as the average revenue curve
- reach the quantity axis at half the quantity that AR does
- stop at the same quantity that average does
11
Q
Draw a marginal revenue curve
A
12
Q
Draw the total revenue curve
A
13
Q
What is the relationship between MR and TR
A
When MR = + , TR = increases
When MR = - , TR = decreases
14
Q
How does total revenue be affected by elastic demand
A
- increase in price will decrease total revenue
- decrease in price will increase total revenue
15
Q
How does total revenue be affected by inelastic demand
A
- Increase in price = increase total revenue
- decrease in price = decrease total revenue
16
Q
Why does price elasticity change along the demand curve?
A
- At higher prices, a % change in price will have a bigger impact on consumers (demand is elastic)
- At lower prices, a % change in price will have a smaller impact on consumers (demand is inelastic)
17
Q
What is revenue maximization?
A
When MR = 0
18
Q
what does a short run?
A
at least one factor is fixed
19
Q
what does a long run?
A
all factors are variable
20
Q
what are variable costs?
A
costs that vary with output
21
Q
what are fixed costs?
A
costs that don’t vary with output
22
Q
where are fixed costs found in?
A
short run only
23
Q
where are variable costs found in?
A
both short and long run
24
Q
What is the formula for total cost?
A
total cost (TC) = total fixed cost (TFC) + total variable cost (TVC)
25
What is the average fixed cost (AFC) formula?
TFC / Q
26
What is marginal cost?
the additional cost of selling one extra unit
27
what is the formula for marginal cost (MC)
change in TC / change in Q
28
what is the relationship between productivity and marginal cost?
productivity increases = marginal cost will decrease
productivity decreases = marginal cost will increase
29
what is another term for decreasing productivity?
diminishing marginal returns
30
where does diminishing marginal returns only occur in?
the short run
31
what does the law of diminishing marginal returns state?
In the short run, as more factors are employed, the marginal returns from these factors will eventually decrease
32
draw a marginal cost curve
33
what is the formula for average variable cost (AVC) ?
TVC / Q
34
what is the relationship between marginal cost (MC) and average variable cost (AVC)?
- When MC is below AVC, AVC will decrease
- When MC is above AVC, AVC will increase
- When MC = AVC, AVC is at its lowest
35
can you draw an average fixed cost graph and explain what is going on
as quantity increases, fixed cost spread across more units
36
What are the 2 formulas for Average total cost (ATC)
AFC + AVC or TC/Q
37
what are internal economies of scale?
when long run average costs fall as a firm’s quantity increases.
38
what are the 6 different types of internal economies of scale?
1) purchasing
2) technical
3) managerial
4) marketing
5) financial
6) risk-bearing
39
what are risk-bearing economies?
When bigger firms can use their big profits to diversify into new areas, reducing the cost of failure in one sector.
40
Give an example related to risk-bearing economies?
Virgin have diversified into 400 different areas.
41
what are managerial economies?
When bigger firms can afford to hire highly skilled specialist managers, increasing a firm’s productivity and decreasing their LR average costs!
42
Give an example related to managerial economies?
Amazon hire specialist accounting, software and marketing managers.
43
what are financial economies?
When bigger firms are less risky, so they can secure cheaper loans, reducing their long run average costs.
44
Give an example related to financial economies?
Alibaba.com borrowed £3bn at a tiny 2% interest rate.
45
what are purchasing economies?
When bigger firms can bulk-buy and negotiate lower prices, reducing their long run average costs!
46
Give an example related to purchasing economies?
McDonald’s purchase thousands of tonnes of chicken breast at a very low average cost.
47
what are technical economies?
When bigger firms can invest in specialist capital, to increase a firm’s productivity and decrease their long run average costs.
48
Give an example related to technical economies?
Amazon’s warehouse robots and Kameoka’s robot lettuce farmers have massively increased productivity.
49
what are marketing economies?
When bigger firms can spread their marketing costs across many units, decreasing their long run average costs.
50
Give an example related to marketing economies?
Guinness, Beats or Nike, who spend millions on marketing in total but just pennies on average, because their costs are so spread out.
51
what is one key thing about internal economies of scale
they happen in the long run
52
What are the 3 causes of internal diseconomies of scale
- Alienation
- Bureaucracy
- Communication
53
How does Alienation lead to internal diseconomies of scale?
When workers feel alienated in very large firms, like they’re just another cog in the machine. This leads to demotivation, decreasing productivity, increase LRAC.
54
Give an example of alienation
large call centres in India.
55
How does Bureaucracy lead to internal diseconomies of scale?
Bureaucracy is all the paperwork, managers, filing and secretaries that a firm has to pay for when it expands, increasing LRAC.
56
How does Communication lead to internal diseconomies of scale?
In big firms, employees may argue with each other and communication will be slow because big firms have so many layers. These factors will reduce productivity, increasing LRAC.
57
What is internal diseconomies of scale?
when long run average costs rises as a firm’s quantity increases.
58
what is the minimum efficient scale (MES)?
a point where a firm first reaches its lowest LRAC
59
What is external economies of scale?
when a firm’s long run average costs fall, as industry output increases.
60
give 2 ways in which external economies of scale can happen?
- lower recruitment costs: In Silicon valley, there are 60,000+ coders which reduces tech firms’ recruitment costs.
- knowledge transfers: In LA’s film industry, the green screen technique was spread by knowledge transfer. Using green screens has reduced film producers’ long run average costs.
61
What is the profit equation?
TR - TC
62
What’s does TC include in the profit equation?
an opportunity cost
63
What is normal profit?
when TR = TC. The firm will just cover its opportunity cost, so it will stay in the market.
64
What are losses?
when TR is less than TC. The firm will make less than normal profit, so it will leave the market because it can’t cover its opportunity cost.
65
What are supernormal profits
when TR is greater than TC. The firm will make more than normal profit.
66
What are supernormal profits also known as?
Abnormal profit
67
Draw a graph making profit
68
Draw a graph making a loss
69
Draw a graph with an increase in revenue
Price increased and quantity increased
70
Draw a graph with a decrease in revenue
Price decreased and quantity decreased
71
Draw a graph with an increase in variables costs
Price increased but quantity decreased
72
Draw a graph with a decrease in variable costs
Price decreased and quantity increased
73
Draw a graph of an increase in fixed costs
Price and quantity don’t change but they end up make a loss
74
Where is the Short run shut down point?
Where AR = AVC
75
Draw a short run graph of AVC < price and explain what firms would do in this scenario
Firms will stay in the market since its covering its variable costs
76
Draw a short run graph of AVC > price and explain what firms would do in this scenario
Firms would shutdown and leave the market as they can’t cover AVC
77
In the long run shut down point, what does ATC equal to?
ATC = AVC
78
Draw a long run graph of ATC < price and explain what firms would do in this scenario
Stay in the market
79
Draw a long run graph of ATC > price and explain what firms would do in this scenario
They would leave the market
