3.3 Revenues, Costs & Profits

• What is the Formula for Total Revenue?

  Total Revenue (TR) = Selling Price (P) x Quantity Sold (Q)
• What is the Formula for Average Revenue?

  Average Revenue (AR) = Total Revenue (TR) ÷ Quantity (Q)
• What is Marginal Revenue and its Formula?

  Marginal revenue is the extra revenue received from the sale of an additional unit of output.

  Marginal Revenue (MR) = ∆ Total Revenue (∆TR) ÷ ∆ Quantity (∆Q)
• What are Fixed Costs?

  Costs that do not vary with level of output.
• What are Variable Costs?

  Costs that vary directly with level of output.
• What are Sunk Costs?

  Costs required to start-up a firm and can no longer be recovered.
• What are Marginal Costs and its Formula?

  Cost of producing one additional unit.

  
  

  Marginal Costs (MC) = ∆ Total Cost (∆TC) ÷ ∆ Quantity (∆Q)
• What is the Formula for Total Costs?

  Total Costs (TC)= Total Fixed Costs (TFC) + Total Variable Costs (TVC)
• What is the Formula for Total Variable Costs?

  Total Variable Costs (TVC)= Variable Cost (VC) x Quantity (Q)
• What is the Formula for Average Total Costs?

  Average Total Costs (ATC)= Total Costs(TC) ÷ Quantity (Q)
• What is the Formula for Average Fixed Costs?

  Avg. Fixed Costs (AFC)= Total Fixed Costs(TFC) ÷ Quantity (Q)
• What is the Formula for Average Variable Costs?

  Avg. Variable Costs (AVC)= Total Variable Costs (TVC) ÷ Quantity (Q)
• What is Economies of Scale?

  Falling avg. costs of production that result from a rise in level of output
• What is Internal EoS?

  Fall in costs of production due to increased output of individual firm
• What is External EoS?

  Occurs within an industry, where all competitors benefit.
• Financial Economies:

  • Larger firms receive lower interest rates on loans than smaller firms (banks see lower risk), leading to cheaper loans and lower average cost (AC)
• Managerial Economies:

  • Firms employing specialist managers are more efficient, leading to lower average cost (AC)
• Marketing Economies:

  • Large firms spread the cost of advertising over a large number of sales, resulting in lower average cost (AC)
• Purchasing Economies:

  • Large firms buying raw materials in larger volumes receive bulk discounts, leading to lower average cost (AC)
• Technical Economies:

  • Firms using more machinery at a higher level of capacity due to increased output - spread the cost of machinery over more units, resulting in lower average cost (AC)
• Risk-bearing Economies:

  • Firms spread the risk of failure by increasing product differentiation, leading to less failure and lower average cost (AC)
• What is Diseconomies of Scale?

  Rising avg. costs with an increased level of output - experiences a decreasing returns to scale.
• What is Management Diseconomies?

  When managers work more in self-interest than in interest of firm - reduces efficiency and raises AC.
• What is Communication Diseconomies?

  When firms with multiple layers of management struggle to communicate quickly - inefficient - raises AC.
• What is Geographical Diseconomies?

  When firms have widespread locations - leads to logistical and communication issues - raises AC.
• What is Cultural Diseconomies?

  When firms expand into foreign markets - workers have different cultural productivity norms - raises AC.
• What is the Minimum Efficient Scale?

  Lowest possible cost per unit that a firm can achieve in LR.
• What are the Sources of External EoS?

  • Geographical Cluster: As an industry grows, firm moves closer to manufacturers to cut costs.
  • Transport Links: Improves transport of logistics - efficiency.
  • Skilled Labour: Increase in supply of skilled labour lowers cost of it.
  • Favourable Legislation: Gov. supports certain industries in order to achieve wider objectives.
• What are Diminishing Marginal Returns?

  Increase in productivity decreases output and increases total costs.
• What is Normal Profit?

  Minimum level of profit necessary to keep a firm in line of its business.
• What is Supernormal Profit?

  Profit above and beyond the level deemed adequate to remain in a market.
• What is the Shut-down rule?

  If avg. costs are greater than avg. revenue in SR, firm should be incentivised to shut down in order to not suffer any more losses.