Revenues, Costs and Profits Flashcards
What is the formula for total revenue
Price x quantity sold
What is marginal revenue
This is the extra revenue a firm earns from the sale of one extra unit
When is total revenue is maximised
When marginal revenue
How do calculate Average revenue
Total Revenue / quantity sold
Explain what makes the AR horizontal or downward sloping
AR is horizontal when firms are price takers
AR is downward sloping where firms are price marker
What is internal economies of scale
This occurs when a firm becomes larger and average costs of production fall as output increases
What are some examples of internal economies of scale
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- Risk bearing: When a firm becomes larger, they can expand their production range. Therefore, they can spread the cost of uncertainty
- Financial: Banks are willing to lend loans more cheaply to larger firms, because they
are deemed less risky
- Managerial: Larger firms are more able to specialise and divide their labour
- Technological: Larger firms can afford to invest in more advanced and productive machinery and capital, which will lower their average costs
- Marketing: Larger firms can divide their marketing budgets across larger outputs, so the average cost of advertising per unit is less than that of a smaller firm
- Purchasing: Larger firms can bulk-buy, which means each unit will cost them less
What is external economies of scale
This occurs within an industry when it gets larger
What is diseconomies of scale
This occurs when output passes a certain point and average costs start to increase per extra unit of produced
What are some examples of diseconomies of scale
CCC
- Control: It becomes harder to monitor how productive the workforce is, as the first become larger
- Coordination: It is harder and complicated to coordination every worker, when there
are thousands of employees
- Communication: Workers may start to feel alienated and excluded as the firm grows. This could lead to falls in productivity and increases in average costs, as they
lose their motivation.
What is normal profit
Normal profit is the minimum reward required to keep entrepreneurs supplying their enterprise in the long run
What is supernormal profit
Supernormal profit is the profit above normal profit where TR > TC
