Price, costs and revenues

Question 1

Shut down points

Answer 1

The point at which firms are no longer able to cover their average costs

Question 2

Marginal revenue

Answer 2

The extra revenue firms earn from selling one extra unit of production

Question 3

Perfectly elastic demand curve

Answer 3

Horizontal demand curve
No price setting power

Question 4

Fixed costs

Answer 4

Costs that do not change with the output changes

Rent

Question 5

Variable costs

Answer 5

Costs that do change as the output changes

Materials

Question 6

Marginal costs

Answer 6

The extra cost of producing one extra unit of output

Question 7

Short run costs curve

Answer 7

One factor of production is fixed and does not change

Question 8

Differences between costs in the short run vs the long run

Answer 8

SR - Law of diminishing marginal returns
LR - Economies or diseconomies of scale

Question 9

Normal profit

Answer 9

If the firm is able to cover its total costs and its opportunity costs it will earn normal profits

Question 10

In the SR, when should a firm stay open

Answer 10

If it is able to cover its variable costs

Question 11

Economies of scale

Answer 11

As output prices costs fall over a long time

Question 12

Increasing returns to scale

Answer 12

An increase in inputs will lead to an increase in the outputs of a business

Question 13

Diseconomies of scale

Answer 13

The firms experiences decreasing returns to scale

As a result of inefficiency, this causes average costs to rise

Question 14

Minimum efficient scale

Answer 14

Is the minimum level of output needed for a business to fully exploit its economies of scale

Question 15

Internal economies of scale

Answer 15

Economies of scale that come from internal growth within the firm

Question 16

Technical economies of scale

Answer 16

Improvements in the production process of a firm

Specialisation
Increased capital
Division of labour
Research and development

Question 17

Financial economies of scale

Answer 17

More assets
Better security
Better credit
More finance
Better investment portfolios

Question 18

Risk bearing economies

Answer 18

They are able to operate in multiple markets
Less risk
More stability

Question 19

Managerial economies of scale

Answer 19

Specialist managers
Better productivity

Question 20

Marketing and purchasing economies of scale

Answer 20

Bulk purchasing economies of scale (buy larger outputs at lower prices)

Distribution (discounted travel as they offer lots of business)

Question 21

External economies of scale

Answer 21

These occur as a result of the growth of the whole industry

Question 22

Labour as an external economy of scale

Answer 22

Businesses established in one area, abundance of labour/workers, Silicon valley, easy to recruit

Education and training programmes, more skilled workforce, easy to recruit workers

Question 23

Types of diseconomies of scale

Answer 23

Workers (as businesses grow, they feel less appreciated, lose motivation, work less, productivity falls)

Seperation of control (firms have to transport a further distance, difficult to control)

As businesses grow, increased demand for materials, price rises over time, as demand rises