revenue cost profits

Question 1

total revenue meaning

Answer 1

total income gained from selling the firms output
total revenue = price x quantity

Question 2

average revenue meaning

Answer 2

revenue per unit of output
AR = demand curve
average revenue = total revenue/ quantity

Question 3

how does a graph look like with perfect competition

Answer 3

perfectly elastic demand curve
AR is horizontal in perfect competition as the firms have no price setting power
MR=AR=D
total revenue is upwards sloping as more goods are sold then more profits are made

Question 4

how does a graph look like with imperfect competition

Answer 4

price decreases as output increases
AR curve is downwards sloping
firms have price setting ability

Question 5

short run meaning

Answer 5

at least 1 factor of production is fixed

Question 6

long run meaning

Answer 6

all factors of production are variable

Question 7

total cost meaning

Answer 7

cost of producing at a given level of output

Question 8

total fixed cost meaning

Answer 8

cost that do not change with the output and remain constant
e.g. rent, machinery, marketing

Question 9

sunk cost meaning

Answer 9

fixed costs that cannot be recovered if the firm shuts down

Question 10

total variable cost meaning

Answer 10

cost that change with output
e.g. materials, packaging

Question 11

law of diminishing marginal productivity meaning

Answer 11

after a certain point adding more variable factors when other factors are fixed will cause fall in marginal output

Question 12

marginal cost meaning

Answer 12

the cost of production one extra unit of output

Question 13

economies of scale meaning

Answer 13

increase in output will lead to a decrease in average cost

Question 14

diseconomies of scale meaning

Answer 14

increase in output will lead to an increase in average cost

Question 15

minimum efficient scale meaning

Answer 15

minimum level of output for the firm to exploit economies of scale
where LRAC stops falling

Question 16

causes of vertical shifts of LRAC

Answer 16

economies of scale cause a downwards shift as AC falls at every given point
increased tax- moves upwards as AC increases
new production technology- increases productivity- lowers AC

Question 17

internal economies of scale meaning

Answer 17

occurs when firm grows larger and average COP falls as output increases

Question 18

types of internal economies of scale

Answer 18

risk bearing- diversification in different markets to have other parts of the business to fall back on

financial- lower IR on loans for larger firms, more assets = less risk = cheaper access to credit

managerial- larger firms specialise, divide labour, have specialised employee

technological- larger firms = invest in better machinery/ capital increase productivity

purchasing- bulk buying raw materials for cheaper

technical- specialisation, research and development better quality

Question 19

external economies of scale meaning

Answer 19

growth of the industry within which the firm operates independent to the firm itself

Question 20

types of external economies of scale

Answer 20

agglomeration- firms in similar industries cluster together and attract skilled labour.

location/ travel- better transport, training courses,,

Question 21

examples of diseconomies of scale

Answer 21

managerial- firms become too big, too many managers, slow decisions
workers may feel alienated
communication problems so wrong decisions made
higher costs
conflicts
inefficiency
large difference between highest paid worker and lowest paid worker = inequalities

Question 22

ev for economies of scale

Answer 22

all businesses can exploit internal economies of scale so it may not give them an advantage
economies of scale can run out
pricing strategies can lead to economies of scale but can cause consumer welfare loss
small businesses can prosper even if there are large dominant firms

Question 23

profits meaning

Answer 23

revenue - costs

Question 24

normal profits meaning

Answer 24

minimum return needed to stay in business

Question 25

supernormal profits meaning-

Answer 25

excess of normal profits

Question 26

subnormal profits meaning

Answer 26

when firm fails to cover total costs

Question 27

importance of profits

Answer 27

retained profits is a source of finance
increase in supernormal profits signals for new firms to join the market
rise in profits signals improvement in supply side policies

Question 28

short run shut down point meaning

Answer 28

when a business is making a loss
when AVC is above AR