Pack 7: Costs, Revenue and Profit

Question 1

What is the short-run?

Answer 1

Time period where at least one factor of production cannot be varied

Question 2

What is the long-run?

Answer 2

Time period where all factors of production can vary

Question 3

What is diminishing marginal productivity/returns?

Answer 3

As more variable factors are added to a fixed factor, marginal product will eventually fall

Question 4

What is marginal cost?

Answer 4

Addition to the total cost by the production of one more additional unit of output

Question 5

What is the relationship of marginal cost/product?

Answer 5

Inverse, when cost MC rises MP falls

Question 6

What is total cost?

Answer 6

Addition of all costs (fixed + variable)

Question 7

What is fixed cost?

Answer 7

Costs that don’t vary with output, e.g. rent, manager salary

Question 8

What is variable cost?

Answer 8

Costs which vary with output, e.g. raw materials, wages

Question 9

What is average (total) cost? (AC)

Answer 9

Total cost / quantity

Question 10

What is average variable cost?

Answer 10

Total variable cost / quantity

Question 11

What is average fixed cost?

Answer 11

Total fixed cost / quantity

Question 12

What is long run average cost?

Answer 12

The cost per product produced, when all factors of production are available

Question 13

What are economies of scale?

Answer 13

Factors which cause long-run average cost to fall as the size of the firms output increases

Question 14

What are the different types of economies of scale?

Answer 14

~Financial economies
~Purchasing economies
~Technical economies
~Marketing economies
~Managerial economies
~Economies of increasing dimensions

Question 15

What are diseconomies of scale?

Answer 15

Factors which cause long-run average cost to rise as a firms output increases

Question 16

What are the types of diseconomies of scale?

Answer 16

~Communication and coordination problems
~Motivation issues
~Bureaucracy

Question 17

What’s the minimum efficient scale?

Answer 17

Lowest level of output at which long-run average cost is minimised

Question 18

What are external economies of scale?

Answer 18

Factors causing long-run average cost to fall as the size of the industry increases

Question 19

What are factors leading to gains from external economies of scale?

Answer 19

~Skilled labour attracted to area
~Suppliers may locate nearby
~Better infrastructure
~Shared innovations and administration

Question 20

What is total revenue?

Answer 20

total money received from selling products
(Price x quantity)

Question 21

What is average revenue?

Answer 21

Revenue per unit sold
(Total revenue / quantity)

Question 22

What is marginal revenue?

Answer 22

Additional revenue gained by selling one more unit
(Change in revenue / change in quantity)

Question 23

What does average revenue equal?

Answer 23

price

Question 24

What is revenue in perfectly competitive markets?

Answer 24

~AR and MR both equal and constant
~Price takers

Question 25

What is revenue in non competitive markets, e.g monopoly?

Answer 25

~MR will fall twice as fast as AR ~Price makers ~MR is the gradient of TR ~When MR = 0 revenue not rising or falling, TR is maximised

Question 26

What is total profit?

Answer 26

Total revenue - total cost

Question 27

What is average profit?

Answer 27

Profit made per unit (total profit / quantity)

Question 28

What is marginal profit?

Answer 28

Additional profit earned by selling one more unit (Change in total profit / change in quantity)

Question 29

What is normal profit?

Answer 29

Minimum amount of profit needed to keep firm in the industry (When AC=AR or TC=TR)

Question 30

What is supernormal profit?

Answer 30

Any profits earned above minimum amount necessary to keep firm in industry ( When AC

Question 31

What are losses?

Answer 31

Situation where profits earned are below minimum amount necessary to keep firm in industry (When AC>AR or TC>TR)

Question 32

What is profit maximisation?

Answer 32

When business earn largest difference between total revenue and total cost in a market. Achieved when MC=MR