3.3 Revenues, Costs and Profits Flashcards
(38 cards)
What is revenue?
The money earned from the sale of goods and services.
Revenue can be classified into total revenue, average revenue, and marginal revenue.
Define total revenue (TR).
The total amount of money coming into the business through the sale of goods and services: quantity x price.
Total revenue is a key measure of business income.
What is average revenue (AR)?
Total revenue divided by output.
Demand is equal to average revenue.
Define marginal revenue (MR).
The extra revenue that the firm earns from selling one more unit of production: change in total revenue/change in output.
MR can also be calculated as total revenue from ‘N’ goods minus total revenue from (N-1) goods.
What type of demand curve do firms in perfect competition experience?
A perfectly elastic demand curve.
These firms have no price-setting power.
What occurs when marginal revenue is positive?
Total revenue grows as the firm sells the product at a lower price or increases output, indicating an elastic demand curve.
This occurs up until output Q.
What happens when marginal revenue is negative?
Total revenue decreases as price decreases or output increases, indicating an inelastic demand curve.
This occurs after output Q.
When is total revenue maximized?
When marginal revenue equals zero.
At this point, the demand curve is unitary elastic.
What is the economic cost of production?
The opportunity cost of production; the value that could have been generated had the resources been employed in their next best use.
This reflects the trade-offs in resource allocation.
Differentiate between total fixed cost (TFC) and total variable cost (TVC).
TFC: Costs that do not change with output and remain constant; TVC: Costs that change directly with output.
Examples include rent (TFC) and materials (TVC).
What is marginal cost (MC)?
The extra cost of producing one extra unit of a good: change in total cost/change in output.
This cost is crucial for determining optimal production levels.
What is the Law of Diminishing Returns?
If a variable factor is increased while 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.
This concept is crucial in understanding production efficiency.
Describe the shape of the average total cost (ATC) curve.
U-shaped due to the law of diminishing marginal productivity.
Initially, costs fall as production becomes more efficient, then rise as overuse occurs.
What do short run average cost (SRAC) curves represent?
They are U-shaped due to the law of diminishing returns.
This contrasts with long run average cost (LRAC) curves, which account for economies and diseconomies of scale.
What is the minimum efficient scale?
The minimum level of output needed for a business to fully exploit economies of scale.
This is the point where the LRAC curve first levels off.
What are internal economies of scale?
Advantages a firm enjoys due to its own growth, independent of industry changes.
These include technical, financial, risk-bearing, managerial, and marketing economies.
What is a characteristic of diseconomies of scale?
They reduce efficiency and cause average costs to rise.
This occurs when output increases by a smaller percentage than inputs.
True or False: External economies of scale arise from the growth of the industry independent of the firm itself.
True.
These economies cause the LRAC curve to shift downwards.
What is a potential disadvantage of large businesses related to workers?
Workers may feel their efforts go unnoticed, leading to decreased motivation and productivity.
This can also affect their sense of belonging to the company.
Fill in the blank: The average fixed cost (AFC) curve starts _______ because the whole fixed costs are being divided by a small output.
high
As output increases, AFC falls as the same amount is divided by a larger number.
What is the relationship between a firm’s size and its ability to respond to change?
It takes much longer and is much more difficult for a large firm to respond to change.
How does the demand for raw materials change as a business grows?
As business grows, so does their demand for raw materials and equipment.
What effect can an increase in demand for raw materials have on production costs?
An increase in demand can cause prices to rise and therefore increase production costs.
What is a challenge of coordinating a multinational company compared to a local 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.
