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• Profit formula

  total profit = total revenue - total cost
• Study tip 27

  Make sure you practise calculating and plotting average and total revenue and also profit from given data.
• The difference between average revenues and total revenue

  Revenue is the money that a firm earns when selling its output. It is important to avoid confusing total revenue and average revenue.Total revenue is all the money a firm earns from selling the total output of a product. It is cumulative. Selling one more unit of a product or good usually causes total revenue to rise. By contrast, at any level of output, average revenue is calculated by dividing total revenue by the size of output:average revenue = (total revenue / output)or:AR = (TR / Q)
• Average revenue

  Total revenue divided by output; in a single-product firm, average revenue equals the price of the product.
• Total revenue


  All the money received by a firm from selling its total output.
• 3.1.3.5 Average revenue, total revenue and profit

  --ContentThe difference between average and total revenue.Why the average revenue curve is the firm's demand curve.Profit is the difference between total revenue and total costs.--Additional informationStudents should be able to calculate average, total revenue and profit from given data.
• Study tip 26

  You should understand the difference between internal and external economies and diseconomies of scale.
• External economy of scale


  Cost saving resulting from the growth of the industry or market of which the firm is a part.
• Internal economy of scale

  Cost saving resulting from the growth of the firm itself.
• Motivational diseconomies of scale

  With large firms, it is often difficult to satisfy and motivate workers. Over-specialisation may lead to de-skilling and to a situation in which workers perform repetitive boring tasks and have little incentive to use personal initiative in ways which help their employee.
• Communication failure

  Communication failure also contributes to managerial diseconomies of scale. In a large organisation there may be too many layers of management between the top managers and ordinary production workers, and staff can feel remote and unappreciated. When staff productivity begins to fall, unit costs begin to rise. As a result, the problems facing the business are not effectively addressed.
• Managerial diseconomies of scale

  As a firm grows in size, administration of the firm becomes more difficult. Delegation of some of the managerial functions to people lower in the organisation may mean that personnel who lack appropriate experience make bad decisions. This may increase average costs of production.
• Reasons for diseconomies of scale

  Firms can suffer from various types or forms of diseconomy of scale as they grow in size. These include managerial diseconomies of scale, communication failure, and motivational diseconomies of scale.
• Economies of scope

  Economies of scope are factors that make it cheaper to produce a range of products together than to produce each on of them on its own. An example is businesses sharing centralised functions, such as finance or marketing.
• Risk-bearing economies of scale

  Large firms are usually less exposed to risk than small firms, because risk can be grouped and spread. Large firms can spread risks by diversifying their output, their markets, their sources of supply and finance and the processes by which they manufacture their output. Such economies of diversification or risk bearing can make the firm less vulnerable to sudden changes in demand or conditions of supply that might severely harm a smaller less diversified business.
• Financial or capital-raising economies of scale

  Financial or capital-raising economies of scale are similar to the bulk-buying economies, except that they relate to the 'bulk-buying' or bulk-borrowing of funds required to finance the business's expansion. Large firms can often borrow from banks and other financial institutions at a lower rate of interest and on better terms than those available to small firms.
• Marketing economies of scale

  Marketing economies of scale are of two types: bulk-buying and bulk-marketing economies. Large firms may be able to use their market power both to buy supplies at lower prices and also to market their products on better terms negotiated with wholesalers and retailers.
• Managerial economies of scale

  The larger the scale of a firm, the greater is its ability to benefit from specialisation and the division of labour within management as well as within the ordinary labour force. A large firm can benefit from a functional division of labour, namely the employment of specialist managers: for example, in the fields of production, personnel and sales. Detail can be delegated to junior managers and supervisors.
• Main types of technical economy of scale

  -IndivisibilitiesMany types of plant or machinery are indivisible in the sense that there is a certain minimum size below which they cannot efficiently operate.-The spreading of research and development costsWith large plants, research and development (R&D) costs can be spread over a much longer production run, reducing unit costs in the long run.-Volume economiesWith many types of capital equipment, costs increase less rapidly than capacity. When a storage tank or boiler is doubled in dimension, its storage capacity increases eightfold.
• Technical economy of scale

  A cost saving generated through changes to the 'productive process' as the scale of production and level of output increase.
• The 'L'-shaped LRAC curve

  
• The 'U'-shaped LRAC curve

  A curve that assumes that economies of scale are followed symmetrically by diseconomies of scale.

  
• Economies and diseconomies of scale summary

  As a firm grows in size by investing in new plant or buildings, it can benefit from economies of scale. However, beyond a certain size, the firm may eventually suffer from diseconomies of scale.Economies of scale are defined as falling long run average costs of production that result from an increase in the size or scale of the firm. Likewise, diseconomies of scale occur when an increase in output leads to rising long-run average costs of production.
• Diseconomy of scale

  As output increases, long-run average cost rises.
• Economy of scale

  As output increases, long-run average cost falls.
• 3.1.3.4 Economies and diseconomies of scale

  --ContentThe difference between internal and external economies of scale.Reasons for diseconomies of scale.The relationship between economies of scale, diseconomies of scale and the shape of the long-run average cost curve.--Additional informationStudents should be able to categorise and give examples of both internal and external economies of scale.
• Long-run average cost

  Long-run total cost divided by output.
• Study tip 25

  You should know that a firms long-run average cost curve may be U-shaped, but other shapes are possible. This differs from a firm's short run average cost curve, which is always assumed to be U-shaped.
• Study tip 24

  Make sure you practice calculating and plotting average and total costs from given data.
• Study tip 23

  It is important to know that a firm's short-run average cost curve is assumed to be U-shaped.
• Cost curve

  
• Average variable cost curve

  
• Average Total Cost formula


  AFC + AVC
• The productively efficient level of output

  Previously, we defined productive efficiency for the whole economy in terms of output being maximised from available inputs, and as a situation in which it is impossible to produce more of one good without giving up production of at least one other good.However, at the micro level, the productively efficient level of output for a single firm is the average cost minimising level of output.
• Average fixed cost curve

  
• Average total cost curve

  
• Average cost

  Total cost of production divided by output.
• Total cost

  The whole cost (fixed cost plus variable cost) of producing a particular level of output.
• Variable cost


  Cost of production which changes with the amount that is produced, even in the short run.
• Fixed cost


  Cost of production which, in the short run, does not change with output.