3.3 Revenues, Costs and Profits

Question 1

Total Revenue

Answer 1

The total income a firm receives. TR = Price x quantity

Question 2

Average revenue

Answer 2

Total revenue/ Quantity

Question 3

Marginal Revenue

Answer 3

The extra revenue gained from selling an extra unit of good

Question 4

Profit

Answer 4

The total revenue - Total costs

Question 5

Normal profit

Answer 5

When TR = TC
The breakeven point for a firm. The minimum profit level necessary to keep the firm in the industry in the long run.

Question 6

Supernormal Profit

Answer 6

This occurs when TR> TC. Profit above the breakeven point

Question 7

Operating profit

Answer 7

This occurs where AR> AVC, when average revenue is greater than average variable cost. The firm is making a contribution towards its fixed cost.

Question 8

Fixed costs

Answer 8

Do not vary with output

Question 9

Variable costs

Answer 9

Costs that vary with output

Question 10

Marginal costs

Answer 10

Costs of producing one extra unit

Question 11

Diminishing Marginal Return

Answer 11

Occurs when employing extra workers leads to declining productivity
Occurs in the SR when one factor is fixed

Question 12

Profit Maximisation

Answer 12

Occurs where MR=MC

Question 13

Economies of Scale

Answer 13

Occur when long run average costs fall with increasing output

Question 14

Internal Economies of Scale

Answer 14

Occur when an individual firm becomes more efficient

Question 15

Examples of Internal Economies of Scale

Answer 15

Specialisation and division of labour
Bulk buying
Technical- larger more efficient machines
Financial economies- Better rates of interest
Marketing- Wider scale advertising
Risk Bearing- bigger firms can diversify

Question 16

External Economies of Scale

Answer 16

Occurs when firms benefit from the whole industry getting bigger. All firms will benefit from better infrastructure, access to specialised labour and good supply networks.

Question 17

Diseconomies of Scale

Answer 17

When LRAC start to rise with increased output.

Question 18

Examples of Diseconomies of Scale

Answer 18

Poor communication
Alienation- Working in assembly line can be boring and repetitive
Lack of control- larger no. workers is harder to monitor and manage so worker efficiency can decrease.

Question 19

Minimum Efficient Scale

Answer 19

The minimum point of output necessary to achieve the lowest AC on the LRAC