Business costs, revenues and profits

Question 1

What is profit

Answer 1

Profit is the reward for risk-taking

Question 2

What is the formula for profit

Answer 2

Profit = Total Revenue - Total COst

Question 3

What is total revenue

Answer 3

Total revenue is the total income received by a firm from the selling of its products. It is found by the price of its product multiplied by quantity sold

Question 4

What is the formula for total revenue

Answer 4

Total revenue = Price * Quantity

Question 5

What are total costs

Answer 5

Total costs are all costs encountered by firms in order to produce goods and services

Question 6

What is the formula for total costs

Answer 6

Total costs = Fixed costs + Variable costs

Question 7

What are fixed costs

Answer 7

Fixed costs are the costs that remain the same regardless of the output produced

Question 8

Give some examples of fixed costs

Answer 8

Rent
Salaries
Insurance

Question 9

What are variable costs

Answer 9

Variable costs are the costs that vary according to the output produced. They are proportionate to the output

Question 10

Give some examples of variable costs

Answer 10

Raw materials
Wages

Question 11

What are average costs

Answer 11

Average costs are the costs per unit of production

Question 12

What is the formula for average costs

Answer 12

Average costs = Total costs / Total output

Question 13

What is average revenue

Answer 13

Average revenue is the revenue received per unit sold

Question 14

What is the break-even point

Answer 14

The break-even point is the point where total costs are equal to total revenue

Question 15

Give four reasons why profits are important

Answer 15

1. Profits can be retained and used for investment purposes, helping the firm remain competitive and ensuring their survival
2. Profits can be used to pay out dividends to shareholders
3. Profits can be used to judge the success of a firm
4. Profits can be used to pay taxes

Question 16

What are some possible aims for firms other than maximizing profits

Answer 16

1) Profit sacrificing: Profit sacrificing occurs when ownership and management of a firm are separated. Management tries to achieve a sufficient amount of profit to keep shareholders happy, while pursuing other goals in the meantime

2) Survival: Firms may have the objective of survival instead of profit maximization when the climate is unfavorable

3) Cooperatives and public sector firms: These firms have other objectives instead of profit maximization such as pleasing the workers

Question 17

What are economies of scale

Answer 17

Economies of scale is the fall in the long run average costs as the size and the output of a firm increases

Question 18

List ways in which firms benefit form internal economies of scale

Answer 18

Financial economies
Purchasing economies
Marketing economies
Technical economies
Managerial economies
Risk-bearing economies

Question 19

How do firms benefit from financial economies

Answer 19

By becoming bigger, firms can raise money more easily. Large firms have more assets, making them low risk borrowers as they can use these assets as security if they can’t repay the loan. Consequently, banks are willing to loan them money with lower interest rates, resulting in their average costs falling

Question 20

How do firms benefit from purchasing economies

Answer 20

When a firm gets bigger, they need more materials in order to increase production. This allows them to buy materials in bulk, something that gives them discounts and better prices, resulting in their average costs falling

Question 21

How do firms benefit from technical economies

Answer 21

As a firm gets bigger, they are able to afford to buy the best machinery and spend money on research and development to come up with new methods of production. These methods are more efficient and help reduce the average costs of firm in the long run

Question 22

How do firms benefit from managerial economies

Answer 22

As a firm gets bigger, they are able to employ specialist staff such as managers that are highly skilled. These employers help run the business and make production more efficient, reducing average costs in the long run

Question 23

How do firms benefit from risk-bearing economies

Answer 23

When a firm gets bigger, they can afford to start producing a variety of goods and even sell in wider markets. This allows them to reduce the risk of producing, as they have many alternatives when a product stops being sold. Consequently, they can reduce their average costs as they are not in risk of losing money

Question 24

What are diseconomies of scale

Answer 24

Diseconomies of scale is the rise in the long run average costs as the size and output of a firm increases

Question 25

List reasons why a firm might experience diesconomies of scale

Answer 25

Management diseconomies Labour diseconomies Adminstrative diseconomies

Question 26

How do firms experience management diseconomies

Answer 26

When a firm gets bigger, they need to hire more managers in order to run the firm. However, these managers often disagree and it is difficult for them to reach a decision, resulting in productivity falling. Also, these managers have huge salaries that increase costs significantly

Question 27

How do firms experience labour diseconomies

Answer 27

Large firms use methods like division of labour, which make workers bored as they do the same task all day. This results in them becoming less productive, and increasing average costs in the long run. These workers also have salaries that are costly to firms, further increasing average costs

Question 28

How do firms experience administrative diseconomies

Answer 28

When a firm gets bigger, there is an increase in bureaucracy such as filling forms or getting permissions. This unnecessary bureaucracy takes a lot of time, slowing down procedures and causing inefficiency

Question 29

What are external economies of scale

Answer 29

External economies of scales is the fall in the long run average costs an individual firm experiences when the industry in which it operates grows in size

Question 30

What are the advantages of the whole industry being large

Answer 30

1) Skilled labour: Firms can steal workers already trained by other firms 2) Development of subsidiary industries: Specialist suppliers may arise that provide materials and service and supply parts for machinery 3) Co-operation between firms: Firms work together and bring benefits to the whole industry 4) Infrastructure: If a certain industry is located in a particular region the government may improve road and communication networks in the area to help them