Revenue, Costs and Profit

Question 1

Economies of Scale

Answer 1

Falling average cost per unit as output increases.

Question 2

External economies of scale

Answer 2

Falling average costs of production due to factors outside of the firm due to growth in the size of the industry or the business environment in which the firm operates.

Question 3

What are the types of internal EoS

Answer 3

Really - Risk Bearing
Fun - Financial
Mums - Managerial
Try - Technical
Making - Marketing
Pies - Purchasing

Question 4

Technical Eos

Answer 4

Falling long run average cost per unit due to the use of specialised equipment, automated manufacturing, containerisation.

Question 5

Purchasing EoS

Answer 5

Falling long run average cost per unit from bulk buying, larger firms can use its monopsony power.

Question 6

Managerial EoS

Answer 6

Falling long run average cost per unit due to a firm hiring specialist managers, who’s expertise allow tasks to be made more efficiently.

Question 7

Financial EoS

Answer 7

Falling long run average cost per unit in larger firms as they are often less risky and so they can get bigger loans at lower interest rates than smaller firms.

Question 8

Risk Bearing

Answer 8

Larger firms can diversify to spread risk, making business more resilient to changes in market conditions.

Question 9

What are the types of diseconomies of scale?

Answer 9

1. Communication
2. Managerial
3. geographic
4. Cultural

Question 10

Minimum Efficient Scale

Answer 10

• The lowest level of output at which a firm can achieve the lowest average cost of production in the long run.
• At this point, all possible economies of scale have been exploited and the firm operates at maximum efficiency.
• This is where productive efficiency occurs

Question 11

Fixed Costs

Answer 11

Costs that don’t vary with output

Question 12

Variable Costs

Answer 12

Costs that vary directly with output

Question 13

Total Costs

Answer 13

• The total costs which the firm faces.
• Total Variable costs + Total Fixed costs

Question 14

Variable Costs

Answer 14

• The sum of all costs that vary with output
• Variable costs x Quantity

Question 15

Marginal Costs

Answer 15

• The additional cost for producing an additional unit of output.
• Change in total cost / Change in quantity

Question 16

Average Total Cost

Answer 16

• The average cost of producing output.
• Total cost / quantity

Question 17

Average Fixed Cost

Answer 17

• The fixed cost per unit of output produced.
• (The fixed costs spread over each unit of output)
• Total fixed costs / quantity

Question 18

Average Variable Costs

Answer 18

• The variable cost per unit of output (The variable cost spread over each unit of output)
• Total variable costs / quantity

Question 19

Total Revenue

Answer 19

• The total income a firm recieves for selling goods
• PL x Quantity

Question 20

Average Revenue

Answer 20

• The revenue per unit sold
• Total revenue / Quantity

Question 21

Marginal Revenue

Answer 21

• The additional revenue earned from producing an additional unit of output
• Change in Total Revenue / Change in Quantity

Question 22

What are the different types of profits?

Answer 22

1. Normal
2. Supernormal
3. Subnormal

Question 23

Normal Profit

Answer 23

When Total Revenue = Total Costs (also known as break even)

Question 24

Supernormal Profit

Answer 24

Occurs when Total Revenue > Total Costs

Question 25

Subnormal Profit

Answer 25

Any profit lower than normal profit, where Total Costs > Total revenue

Question 26

Explain the short run cost curve from the assumption of diminishing marginal productivity.

Answer 26

- Diminishing marginal productivity refers to as more factors of production are added, the additional output produced by each extra unit of labour eventually decreases. - Initially, as productivity increases, marginal cost (MC) of producing an additional unit falls. - However, once diminishing marginal productivity sets in, the MC starts to rise because additional units of input contribute to less output, therefore higher costs per unit. - The average cost curve is U-shaped, reflecting initial EoS, but later followed by DEoS due to diminishing marginal productivity.

Question 27

What is the short run shutdown point?

Answer 27

When the firm is unable to cover its variable costs with the revenue it earns.

Question 28

What is the long run shutdown point?

Answer 28

When the firm is unable to cover its total costs in the long run.

Question 29

What are the types of external economies of scale?

Answer 29

- Improved labour supply in the area - Improved shared infrastructure such as roads, ports or communication.