3.3 - Revenue, Costs & Profits

Question 1

Average revenue = (price x quantity) / quantity, what is average revenue equal t0

Answer 1

Revenue = price = average demand

Question 2

What can you rewrite the average revenue curve as

Answer 2

Demand curve

Question 3

What point on the AR curve is TR maximised

Answer 3

Midpoint

Question 4

If firms are price takers what does this mean for demand and revenue

Answer 4

Demand is perfectly inelastic, MR = AR = D, straight horizontal line, TR slopes upwards as selling more goods increases revenue

Question 5

If firms are price makers what does this mean for demand and revenu

Answer 5

Demand is elastic
When MR is positive, D is elastic
When MR is negative, D is inelastic
When MR = 0, TR is max
MR and AR slope downwards with MR twice the gradient. TC is an upside down U

Question 6

Formula for marginal cost

Answer 6

Change in total cost / change in outpiut

Question 7

What costs affect marginal cost

Answer 7

ONLY variable costs

Question 8

Why does MC curve upwards

Answer 8

Diminishing returns

Question 9

What is the tangent to the TC equal to

Answer 9

MC

Question 10

Explain diminishing marginal product

Answer 10

when firms choose to create goods or services, they will select the most productive factors of production to use. As they produce more goods the firm will have to use less and less productive factors of production as they have already used the best

Question 11

What causes movements along the LRAC curve

Answer 11

Changes in output with changes the average cost of production due to internal / external economies / diseconomies of scale

Question 12

What are constant returns to scale

Answer 12

Where firms increase inputs and receive an increase in output by the same percentage

Question 13

What is the minimum efficient scale

Answer 13

The minimum level out output needed for a business to fully exploit economies of scale. LRAC curve levelling off
The lowest output at which average cost is minimised in the long run

Question 14

What are the types of economies of scale 7

Answer 14

Specialisation and division of labour
Managerial eos
Purchasing eos
Risk-bearing eos
Financial eos
Marketing eos
Technological eos

Question 15

When do internal diseconomies of scale occur

Answer 15

When firms growth begins to cause LRAC to decrease

Question 16

Why do tiers of management cause diseconomies of scale

Answer 16

These tiers of management can increase the social distinction between employees
Communication can worsen which can reduce overall efficiency
Managers can find it increasingly difficult to oversee and coordinate actions

Question 17

When the LRAC curve slopes up, what returns to scale are there

Answer 17

Decreasing returns to scale

Question 18

What causes a large MES

Answer 18

High fixed costs

Question 19

When can a firm continue short run operations

Answer 19

If it makes enough revenue to cover its variable costs and begin to pay off its fixed costs

Question 20

What is the shutdown point for short run operations

Answer 20

Where a firm just covers variable costs
(When AR is below AVC)

Question 21

When will a firm shut down long run

Answer 21

If it doesn’t make normal profit

Question 22

When can’t a firm make normal profits (graph)

Answer 22

When the market price (AR) is below the AC

Question 23

In the short run when can firms operate if AR is below AC

Answer 23

If the price covers the AVC so it can pay off some of its fixed costs

Question 24

What is the long run shutdown point (graph)

Answer 24

AVC = AR