Costs, Revenue and Profit

Question 1

Short Run

Answer 1

A period of time where at least one factor of production is fixed, usually capital or land

Question 2

Explicit Costs

Answer 2

Costs that incur a physical payment, such as fixed and variable costs

Question 3

Implicit Costs

Answer 3

The opportunity cost to a firm, such as the profit that could have been made

Question 4

Fixed Costs

Answer 4

Costs incurred that do not vary with output

Question 5

Variable Costs

Answer 5

Costs incurred that vary with output

Question 6

Marginal Cost Formula

Answer 6

Change in Total Cost / Change in Quantity

Question 7

Average Cost Formula

Answer 7

Total Cost / Quantity or Average Fixed Costs + Average Variable Costs

Question 8

Law of Diminishing Returns

Answer 8

• In the short run, when variable factors of production are added to a stock of fixed factors of production, total/marginal product will initially rise and then fall

Question 9

Reasons for Law of Diminishing Returns

Answer 9

• Initially, increased returns to labour occur, due to specialisation or under utilisation of fixed factors of production, which leads to an increase in marginal product
• However, the law of diminishing returns sets in as fixed factors of production become a constraint to the overall production, which reduces labour productivity.

Question 10

Long run

Answer 10

A period of time where all factors of production are variable
~ The firm is able to scale up
~ Consists of many Short Runs

Question 11

Minimum Efficient Scale [MES]

Answer 11

The lowest level of output where Average Costs stop decreasing and fully exploit economies of scale
At this Q*, costs cannot decrease any further, results in constant returns to scale.

Question 12

Economies of Scale

Answer 12

A reduction in LRAC as output increases

Question 13

Internal Economies of Scale

Answer 13

~ Risk Bearing
~ Financial
~ Managerial
~ Technical
~ Marketing
~ Purchasing

[Within a Firms Control]

Question 14

External Economies of Scale

Answer 14

~ Better Transport Infrastructure
~ Component Supplies move Closer
~ Research and Development Firms move Closer

[Within the Industry]

Question 15

Diseconomies of Scale

Answer 15

An increase in a firms LRAC as output increases

~ Control
~ Communication
~ Coordination
~ Motivation

Question 16

Revenue : TR, AR, MR

Answer 16

TR : P * Q
AR : TR / Q = P * Q / Q = P
MR : Change in TR / Change in Q

Question 17

TR MAX when MR = 0

Answer 17

Total Revenue is maximised when MR = 0 due to the fact that when
- MR is negative, TR will also be decreasing
- MR is positive, TR will also be increasing
Hence, TR is maximised when there is no more additional revenue being earned

Question 18

Profit

Answer 18

TR - TC [ Implicit and Explicit ]

Question 19

0 Economic Profit

Answer 19

Normal Profit : The minimum profit required to keep a firms factors of production in current use

~ AR = AC

Question 20

+ Economic Profit

Answer 20

Supernormal / Abnormal Profit : Profit higher than normal profit, with a positive value

~ AR > AC

Question 21

• Economic Profit aka Economic Loss

Answer 21

Profit that is not enough to keep a firms factors of production in their current use

~ AR < AC