Costs, Revenue and Profit

• Diminishing returns


  As firms grow, they experience returns to scale. The scale refers to the firm growing while the returns are the benefits, they receive from getting bigger.
• Laws of diminishing returns

  States that as the percentage of the inputs (factors of production) (CELL) into a firm increase, so too will the production increase but only up to a point and then the percentage increase in output will begin to fall.
• When a firm is experiencing increasing returns to scale the average cost (AC) curve will be sloping downwards
• When a firm is experiencing decreasing returns to scale the average cost (AC) curve will be sloping upwards
• The lowest point on the AC curve is when the firm is getting constant returns to scale and is the maximum level of efficiency
• Fixed costs 


  Costs which do not change with the level of output

  Rent, insurance, manager's salaries
• Variable costs

  • Costs which do change with the level of output
  • Worker's wages, maintenance costs, replacements of technology
• Total costs

  • The total costs incurred by the firm in producing a specific quantity of goods or services
  • FORMULA: Fixed costs + Variable Costs
• Average costs

  • Are also known as unit costs and are the total costs divided by the quantity of output produced
  • Formula= Total costs/Output
• Total Sales Revenue

  • The total income generated by a firm from selling its good or services
  • Formula= Selling Price Per Unit X Quantity Sold
• Average revenue

  • The revenue per unit of output
  • Formula= TR (Total revenue)/ Units Sold
• Profit

  • The money made by a firm when total revenue exceeds total costs
  • Formula= Total Sales Revenue - Total Costs
• Marginal Costs

  • The change in total costs resulting in the change in total output of one unit, it is the extra cost incurred in the production of an extra unit
  • If increasing output from 20 units to 21 units causes a total cost to rise from £100 to £110, then the marginal cost of producing the extra unit is £10
• Reducing costs of production

  • Finding a cheaper supplier
  • Reducing wages
  • Reducing expenses