3.3 revenues, costs and profits

Question 1

total revenue

Answer 1

the total amount of money coming into the business through the sale of goods and services. quantity x price

Question 2

average revenue

Answer 2

demand is equal to AR. total revenue/ output

Question 3

marginal revenue

Answer 3

the extra revenue that the firm earns from selling one more unit of production. change in total revenue/ change in output

Question 4

if MR is positive

Answer 4

when the products are sold at a lower price or output is increased, total revenue still grows and so the demand curve is elastic

Question 5

if MR is negative

Answer 5

TR decreases as price decreases or output increases and so the demand curve in inelastic

Question 6

when MR=0

Answer 6

TR is maximised and the demand curve is unitary elastic

Question 7

total cost (TC)

Answer 7

fixed + variable cost

Question 8

total fixed cost (TFC)

Answer 8

costs that do not change with output and remain constant e.g rent

Question 9

total variable cost (TVC)

Answer 9

costs that change directly with output e.g materials

Question 10

average total cost (ATC)

Answer 10

total costs/ output

Question 11

average fixed cost (AFC)

Answer 11

total fixed cost/ output

Question 12

average variable cost (AVC)

Answer 12

total variable cost/ output

Question 13

marginal cost (MC)

Answer 13

change in total cost/ change in output

Question 14

short run

Answer 14

when at least one factor of production is fixed and cannot be changed

Question 15

long run

Answer 15

when all four factors of production become variable

Question 16

diminishing marginal productivity

Answer 16

if a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit

Question 17

average fixed cost curve

Answer 17

-starts high because the whole fixed costs are being divided by a small output
-as output is increased, AFC falls as the same amount is divided by a larger number

Question 18

average total cost curve

Answer 18

-is U-shaped due to the law of diminishing marginal productivity
-costs initially fall as machinery is used more efficiently but as production continues to expand, efficiency falls as machinery is overused

Question 19

marginal cost curve

Answer 19

-also U-shaped due to diminishing marginal productivity
-it will initially fall as the machines are used more efficiently but will rise as production continues to rise

Question 20

relationship between short run and long run cost curves

Answer 20

-short run average cost curves are U-shaped because of the law of diminishing marginal returns
-long run average costs curves are U-shaped because of economies and diseconomies of scale

Question 21

what is movement long the LRAC curve due to

Answer 21

-a change in output which changes the average cost of production du to internal economies/ diseconomies of scale
-a shift can occur due to external economies/ diseconomies, taxes or technology, which affects the cost of production for a given level of output

Question 22

economies of scale

Answer 22

the advantages of large scale production that enable large businesses to produce at a lower average cost than smaller businesses

Question 23

diseconomies of scale

Answer 23

the disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

Question 24

constant returns to scale

Answer 24

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

Question 25

minimum efficient scale

Answer 25

-the minimum level of output needed for a business to fully exploit economies of scale -the point where the LRAC curve first levels off and when constant returns to scale is first met

Question 26

internal economies of scale

Answer 26

an advantage that a firm is able to enjoy because of a growth in the firm, independent of anything happening to other firms or the industry in general **-technical economies, financial economies, risk bearing economies, managerial economies, marketing and purchasing economies**

Question 27

technical economies

Answer 27

arise as a result of what happened to the production process

Question 28

specialisation

Answer 28

large firms are able to appoint specialist workers and buy specialist machines which will be able to do their jobs more quickly and better than machines/ workers which are not specialised

Question 29

balanced teams of machines

Answer 29

large firms can afford to buy a number of every kind of machine in each stage of production, by combining these machines they can ensure they run each machine at its optimal level

Question 30

increased dimensions

Answer 30

relates to the fact that if you double the size of the walls you can increase the area by four times without doubling the cost

Question 31

indivisibility of capital

Answer 31

some processes require huge items of machinery and investment that make it only possible for them to produce on a large scale

Question 32

research and development

Answer 32

often large firms can afford to carry out large scale research and development, which means they are able to gain a large advantage over their competitor

Question 33

financial economies

Answer 33

large firms have greater security because they have more assets therefore less likely to be forced out of business overnight as a result, it is easier for them to obtain finance and interest rates will be lower due to lower risk making investment more accessible

Question 34

risk bearing economies

Answer 34

large companies are able to operate in a range of different markets, producing different products which means that if one area of a business fails, their whole business will not collapse

Question 35

managerial economies

Answer 35

late companies can afford to appoint specialist managers in every field who are specialised and so have greater knowledge and are able to do their job better

Question 36

marketing and purchasing economies

Answer 36

-buying in bulk -specialisation -distribution

Question 37

external economies of scale

Answer 37

an advantage which arises from the growth of the industry in which the firm operates, independent to the firm itself -causes the LRAC curve to shift downwards **labour, support services**

Question 38

labour

Answer 38

-businesses established in an area with other successful firms from the same industry find that labour tends to come to that area if they want a job in that industry e.g silicon valley. this reduces cost and time taken to recruit -local education and training to the area to prepare people to take up these jobs -firms will be able to hire staff who have been trained by other businesses which is cheaper and more efficient

Question 39

Support services

Answer 39

-businesses who provide products or services for large businesses will naturally move to the area where those businesses are based which reduces transport cost/time delays for the business

Question 40

Diseconomies of scale

Answer 40

**workers, geography, change, price of materials, management**

Question 41

Workers

Answer 41

In a large business, people think their efforts go unnoticed and have less chance of motivation so lose motivation and work less hard, they can also lose their sense of belonging and have less personal commitment and identification with the business

Question 42

Geography

Answer 42

A firm may have to transport finished products huge distances and firms may find it harder to control parts of the business which is miles away

Question 43

Change

Answer 43

It takes much longer and is much more difficult for a large firm to respond to change

Question 44

Price of material

Answer 44

As a business grows so does their demand for raw materials and equipment. Although this can increase their bargaining power as they buy in bulk, an increase in demand can cause prices to rise and therefore increase production costs. This could also occur if the whole industry increases so firms bid up prices

Question 45

Management

Answer 45

**coordination and control** **communication**

Question 46

Coordination and control

Answer 46

-as a business grows it will become progressively more difficult to coordinate and keep control of the different parts of the business. Coordination of a multinational company producing different parts of a car around the world is much more difficult than coordinating and controlling the work of a local garage. This could lead to poorer quality to work and business decisions which don’t work well together.

Question 47

Communication

Answer 47

Within a large business, communication can be slow and also can lose accuracy because of the distance and number of people it has to be passed through

Question 48

Condition for profit maximisation

Answer 48

-profit is maximised when TR and TC are furthest apart with TR voice TC -also occurs when MC=MR, this will always be true because producing one more adds more to revenues than it does to cost, producing that must have increased profit -sometimes MR and MC may cross at two points and thus the profit maximising point is where marginal cost rises as it crosses the MR line

Question 49

Normal profit, supernormal profit and losses

Answer 49

-normal profit is the return that is sufficient to keep the factors of production committed to the business where AC=AR or TC=TR -if profit is greater than normal profit, it is earning supernormal profit where AR > AC or TR > TC -a loss is where firms fail to cover its costs AR < AC or TR < TC