3.3 - Revenues, Costs and Profits Flashcards
(27 cards)
Total revenue
Total amount of money coming into the business through the sale of goods and services
Formula for total revenue
Price * Quantity
Formula for average revenue
Total revenue / Output
Positive marginal revenue
When the firm sells the product at a lower price or when they increase output, total revenue still increases so demand curve is elastic
Negative marginal revenue
Total revenue decreases as price decreases or output increases, so demand curve is inelastic
Opportunity cost of production
Value that could have been generated had the resources been employed in their next best use
Diminishing marginal productivity
As more variable inputs (e.g., labour or raw materials) are added to a fixed factor of production (e.g., capital or land), the additional output produced by each extra unit of input will eventually decrease
Economies of scale
The cost advantages that a firm experiences as it increases production, leading to lower average costs per unit. These occur because fixed costs are spread over more output and operational efficiencies improve
Diseconomies of scale
When a firm’s average costs increase as output expands beyond an optimal level. This happens because growth leads to inefficiencies in communication, coordination, and control
Types of internal economies of scale
- Technical
- Financial
- Risk bearing
- Managerial
- Marketing
- Purchasing
Technical economies of scale
When a firm reduces its average costs by investing in advanced technology, machinery, and production processes. These cost savings happen because larger firms can afford more efficient production methods than smaller firms
Financial economies of scale
When larger firms can borrow money at lower interest rates and access better financial resources than smaller firms. This reduces their cost of capital, making expansion and investment cheaper
Risk bearing economies of scale
When larger firms can spread risks across multiple products, markets, or investments, reducing their overall exposure to financial losses. This makes them more resilient compared to smaller firms that rely on fewer revenue streams
Managerial economies of scale
When large firms can afford to hire specialised managers, leading to greater efficiency and lower average costs. In contrast, small firms may have generalist managers who handle multiple tasks, reducing productivity
Marketing economies of scale
When larger firms can spread their advertising and promotional costs over a larger output, reducing the average cost per unit of marketing. They can also negotiate better deals with advertisers and benefit from stronger brand recognition
Purchasing economies of scale
When large firms can buy raw materials, components, or stock in bulk, allowing them to negotiate lower prices and reduce their average costs per unit. This gives them a competitive advantage over smaller firms
Types of external economies of scale
- Labour
- Support services
Labour as an external economies of scale
When a business benefits from being located in an area with a large, skilled workforce, reducing recruitment and training costs. This is an advantage that arises due to the growth of the industry as a whole, rather than just the individual firm
Support services as an external economies of scale
When firms benefit from the availability of specialised services in their area, which are tailored to the needs of their industry. These services are developed in response to the concentration of firms in a particular sector and contribute to lower operational costs
Types of diseconomies of scale
- Workers
- Geography
- Management
Workers as a diseconomies of scale
The negative effects on a firm’s productivity and efficiency when the number of workers increases beyond an optimal level. This typically happens when a firm becomes too large, and it leads to coordination problems, reduced individual productivity, and inefficiencies in the management of labour
Geography as a diseconomies of scale
The negative effects on a firm’s efficiency and productivity that occur when the physical distance between different parts of the firm becomes too large. As firms expand across different regions or countries, it can lead to increased costs and inefficiencies due to the geographical spread of operations
Management as a diseconomies of scale
The negative effects on a firm’s productivity and efficiency when a business grows too large, requiring more complex management structures. As a firm expands, the management layers and the number of managers increase, which can lead to inefficiencies, slower decision-making, and reduced control over operations
Normal profit
The minimum amount of profit required to keep a firm in business in the long run
