Revenue, cost, profit

• What is total revenue

  Price x quantity
• Average revenue

  What a business receives on Average from each sale

  AR = P, TR/Q
• Marginal revenue

  Additional revenue a firm makes selling one extra unit

  change in TR / change in Q = new TR - old TR / new Q - old Q
• Profit

  Total revenue - total cost
• What is revenue maximisation

  A firms total revenue is maximised when MR= 0
• Variable costs

  Vary with output e.g Ingredients , wages , materials
• Fixed costs

  Costs that don’t vary with output e.g printers, salaries , office space , advertising
• Total cost

  TC = TVC +TFC
• Average fixed cost

  AFC= TFC/Q
• marginal cost

  Additional cost of selling one extra unit change

  MC= change in TC/ change in Q

  ->when Q goes up more than 1
• Law of diminishing marginal returns

  States that as more factors are employed , the marginal returns from these factors will eventually decrease
• Why does MC decrease then increase

  MC initially decreases because as output increases and more workers are hired , they can specialise , increasing productivity and decrease MC but MC will then increase because diminishing marginal returns will decrease productivity , increasing MC
• Average variable cost

  TVC / Q
• Average total cost

  TC/Q , AVC+AFC
• Internal economies of scale

  Occur when a firm becomes larger . Average costs of production fall as output increases
• Risk - Bearing

  When a firm becomes larger they can expand their production range. Therefore, they can spread the cost of uncertainty. If one part is not successful, they have other parts to fall back on
• Financial economies

  Banks are willing to lend loans more cheaply to larger firms , because they are deemed less risky. Therefore larger firms can take advantage of cheaper credit
• Managerial economies

  larger firms are more able to specialise and divide their labour. They can employ specialist staff which lower average costs
• Technological economies

  Larger firms can afford to invest in more advanced and productive machinery and capital which lower their average costs
• Marketing economies

  Larger firms can divide their marketing budgets across larger outputs , so the average cost Of advertising per unit is less then that of a smaller firm
• Purchasing economies

  Larger firms can bulk-buy which means each unit will cost them less. For example supermarkets have more buying power from farmers than corner shops , so they can negotiate better deals
• What are three Main reasons of internal diseconomies of scale

  Alienation , Bureaucracy , communication
• Alienation

  When employees are by them selves when working -> decreasing their motivation -> increasing firms LRAC
• Bureaucracy

  When firms expand so they employ more people -> increasing firms LRAC
• communication

  Communication can waste time in a business -> increasing firms LRAC
• Internal economies of scale

  Reductions in long run average cost , as a firms size increases
• External economies of scale

  Reductions in long run average cost as industry output increases