3.3 Revenues, Costs & Profits

Cards (32)

  • 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.