Cost, Revenue, Profit Theory

Question 1

Law of diminishing returns

Answer 1

After reaching an optimal production level, adding more of a production factor results in smaller output increases

Question 2

Short run

Answer 2

Period of time in which at least one factor of production is fixed. All production takes place in the short run

Question 3

Long run

Answer 3

Period of time in which all factors of production are variable, but the state of technology is fixed. The firm can change its size or its scale of production. All planning takes place in the long run

Question 4

A firm

Answer 4

Organisation that brings together different factors of production (land, labor, capital, enterprise) to produce goods and services which is then hoped can be sold for a profit

Question 5

Profit

Answer 5

TR - TC = Profit

Firms will want to produce that level of output where revenue > costs by the greatest amount

Question 6

Economies of scale

Answer 6

decreasing costs per unit

Question 7

Diseconomies of Scale

Answer 7

increasing costs per unit

Question 8

Fixed costs (TC)

Answer 8

Cost that arise even when output is 0

Question 9

Variable costs (VC)

Answer 9

Cost that vary with level of output

Question 10

Total costs (TC)

Answer 10

Fixed Cost + Variable Cost

Question 11

Average costs

Answer 11

the cost per unit of production/output (Can also look at AFC, AVC, and ATC)

Question 12

Marginal cost

Answer 12

the addition to cost from producing an additional unit of output

Question 13

Marginal cost (MC) formula

Answer 13

ᐃTC/ᐃq

Question 14

Break even point

Answer 14

TR = TC

At this level of output, firms earn just enough to keep them in the market

Question 15

Shut down point

Answer 15

• The price at which a firm is able to cover its variable costs in the short run so P = AVC, so it is only losing its fixed costs.
• P < AVC = shut down point

Question 16

Normal Profit, Abnormal Profit, Loss Formula

Answer 16

Normal Profit: TR = TC or AR = AC
Abnormal Profit: TR > TC or AR > AC
Loss: TR < TC or AR < AC

Question 17

Total revenue

Answer 17

total amount of money that a firm receives from selling a certain amount of a good or service in a given time period

TR = P x Q

Question 18

Marginal revenue

Answer 18

the addition to revenue from selling an additional unit in a given time period

MR = ᐃTR/ᐃq

Question 19

Normal profit

Answer 19

TR = TC

Question 20

Profit maximization

Answer 20

• MR = MC
• Greatest positive difference between total revenue and total costs
• It is achieved by increasing total revenue or minimizing costs of production

Question 21

Revenue maximization

Answer 21

It is greater than the profit maximising level of Q
where MR = 0

Question 22

Market Share

Answer 22

a firm’s portion of total value of sales in a particular industry

Question 23

Satisficing

Answer 23

A firm makes just enough profit to satisfy different stakeholders OR pursue other objectives OR because decision makers don’t have the necessary info in order to maximise profits

Question 24

CSR

Answer 24

Corporate Social Responsibility - public interest decision making where firms employ an ethical code, focus on their impact on the workforce, consumers, local community, environment, etc. (e.g. fair trade)

Question 25

Total Cost, Total Variable Cost, Total Fixed Cost Diagram

Answer 25

Question 26

Diagram of Short Run AVC, AFC, MC

Answer 26

Question 27

Economies of Scale Diagram

Answer 27

Question 28

LRAC and SRAC curve

Answer 28

Question 29

Average revenue

Answer 29

revenue earned per unit of sales

AR = TR/q

Question 30

Revenue when price doesn’t change with output (PED =∞)

Answer 30

D=AR=MR

Question 31

Revenue when price doesn’t change with output (PED =∞) + Marginal Cost

Answer 31

Question 32

Revenue when price falls as output increases (downward sloping, PED falls(↓) as Q rises↑) + Explanation

Answer 32

Question 33

Revenue Theory

Answer 33

• Total revenue (TR)
• Average revenue (AR)
• Marginal revenue (MR)
• Profit (or loss) = TR - TC

Question 34

Cost Theory

Answer 34

• Fixed costs (TFC or FC)
• Variable costs (TVC or VC)
• Total costs (TC) = FC + VC
• Average cost (AC)
• Marginal cost (MC)

Question 35

Profit Theory

Answer 35

Accountant:
Profit = TR - TC

Economist:
Profit = TR - economic cost (explicit and implicit)

Question 36

Explicit Costs

Answer 36

any costs to a firm that involve the direct payment of money

Question 37

Implicit Costs

Answer 37

The earnings a firm could have had if it had employed its factors in another use or if it had hired out or sold them to another firm.
e.g. opportunity costs, or factors that are already owned by the firm

Question 38

Shut down and Break even price in diagram

Answer 38

Question 39

Using diagram to show different profit and loss situation

Answer 39