Booklet 6 - Production costs and revenue

• total variable cost (TVC) = VC x Q
• average fixed cost (AFC) = FC/Q
• marginal cost = change in total cost / change in output
• productivity


  output per unit of factor of production
• division of labour


  breaking down production into specialized tasks to improve efficiency and productivity
• specialisation


  focusing on a narrow range of tasks of a product to improve efficiency
• law of diminishing returns


  as more of a variable input is added to a fixed input, the additional output produced from each extra unit of input will eventually decrease.
• short run


  a time period where at least one of a firms factors of production is fixed
• Long run


  all factors of production are variable allowing a firm to be able to expand its capacity
• fixed cost


  costs that dont vary with level of output of a firm in the short run
• variable cost


  costs that vary within the level of output in the firm
• total cost


  all costs for a firm producing an output
• normal profit


  Total revenue + Total costs
• Average Cost (AC)


  Total Cost (TC) / Quantity of Output (Q) . It shows the cost per unit of output.
• internal economies of scale


  Cost advantages that a firm experiences as it increases its scale of production, leading to lower average costs per unit.
• What causes Internal Economies of Scale?


  Internal factors within the firm, such as improved efficiency, bulk buying, or better use of resources.
• What is an example of Technical Economies of Scale?


  A firm can use more advanced, specialized machinery as it grows, which increases productivity and reduces per-unit costs.
• Purchasing Economies of Scale:

  Larger firms can buy raw materials in bulk at discounted prices, reducing the cost per unit.
• What are Managerial Economies of Scale?


  Larger firms can afford to hire specialized managers, improving decision-making and operational efficiency, reducing overall costs.
• What are Financial Economies of Scale?


  Bigger firms can access finance at lower interest rates due to their reduced risk, lowering the cost of capital.
• What are Marketing Economies of Scale?


  Large firms spread advertising and marketing costs over more units, reducing the cost per unit of marketing.
• External Economies of Scale


  Cost advantages that occur outside a firm but within an industry, as the industry grows and develops, leading to lower average costs for all firms.
• example of External Economies of Scale


  When a region develops better infrastructure (like transport networks), all firms in the area benefit from lower transportation costs.
• How do skilled labour pools contribute to External Economies of Scale?


  As an industry grows, more skilled workers may be attracted to the area, reducing training costs for firms.
• Government investments in research, subsidies, or industry-specific infrastructure can lower costs for all firms in the sector.
• What impact does technological advancement have on External Economies of Scale?

  As industries innovate and improve technologies, all firms can adopt the new technologies, reducing production costs industry-wide.
• Revenue

  Revenue is the total income a firm earns from selling its goods or services before any costs are deducted. Total Revenue (TR) = Price (P) × Quantity Sold (Q).
• Average Revenue (AR)


  Average Revenue is the revenue earned per unit of output sold, calculated as AR = Total Revenue / Quantity Sold.
• Marginal Revenue (MR)


  the additional revenue earned from selling one more unit of a product.
• disruptive technology


  where innovation replaces existing tech offering more efficient solutions
• creative destruction


  where innovation of new products cause destruction of old markets
• Abnormal Profit


  the profit earned over and above normal profit. Total Revenue (TR) - Total Costs (TC)