Topic 4 - Production, costs, revenue and profit

Question 1

Name 5 main business objectives

Answer 1

Profit
Growth
Market share
Survival
Social objectives

Question 2

Explain the business objective of profit

Answer 2

Most businesses will make profit maximisation their central goal. It can be done by increasing revenue or reducing costs.

Question 3

Formula for profit

Answer 3

Sales revenue - total costs

Question 4

Explain the business objective of growth

Answer 4

Very important to businesses as it can help raise profits. It can be through increased sales or market share. If they want to see sales grow it may keep prices low to stimulate sales or by opening more outlets to attract new customers

Question 5

Explain the business objective of market share

Answer 5

A business may want to hold more of the market share and may do this by taking over more sales from competitors.

Question 6

Define market share

Answer 6

The percentage of total revenue or sales in a market that it accounts for

Question 7

How can a business take over more sales from competitors

Answer 7

They can take over a competitor, use heavy promotions and discounts on products or by making the products more appealing

Question 8

Explain the business objective of survival

Answer 8

Some businesses, especially start-ups, will have an objective to survive. Even well-established firms may have an objective to survive if they encounter a situation where sales and revenue are falling

Question 9

Explain the business objective of social objectives

Answer 9

Some firms do not have any financial objectives, but to provide a social purpose.

Question 10

Define costs

Answer 10

The expenses incurred by a firm to produce goods and deliver services

Question 11

Define fixed costs

Answer 11

Any costs that do not change or vary with output

Question 12

Define variable costs

Answer 12

Any costs that do change with output

Question 13

Define total costs

Answer 13

The sum of all of the costs for the business

Question 14

Formula for fixed costs

Answer 14

Total costs = total fixed costs + total variable costs

Question 15

Define average costs

Answer 15

The per unit costs of production

Question 16

Formula for average costs

Answer 16

Average costs = total costs // total output

Question 17

Define revenue

Answer 17

The income the firm receives from the sale of a good or service to its customers

Question 18

Formula for total revenue

Answer 18

Total revenue = number of sales * selling price

Question 19

Define average revenue

Answer 19

The average revenue per unit

Question 20

Formula for average revenue

Answer 20

Average revenue = total revenue // quantity sold

Question 21

Define profits

Answer 21

The difference between costs and revenue

Question 22

Formula for profits

Answer 22

Profit = total revenue - total costs

Question 23

What is the impact of an increase in profit

Answer 23

It will provide the incentive for producers to expand production

Question 24

Define productivity

Answer 24

The level of efficiency during production or the “output per input per period of time” the input is usually workers

Question 25

Formula for productivity

Answer 25

Output // Input

Question 26

Factors that influence productivity

Answer 26

More advanced capital machinery Better and increased quantity of the training of workers Improved morale and motivation for workers More competitive markets Increased capital / more effective management

Question 27

Benefits of increased productivity

Answer 27

Increased output > higher sale > higher profits > growth Lower costs Lower prices for customers Higher wages for workers

Question 28

Define economies of scale

Answer 28

When an increase in a firm's output results in a fall in average costs.

Question 29

2 forms of economies of scale

Answer 29

Internal economies of scale External economies of scale

Question 30

Define internal economies of scale

Answer 30

These occur as a single firm grows and are controlled by the company

Question 31

Define external economies of scale

Answer 31

These occur within the industry, where all participating firms benefit

Question 32

Benefits of economies of scale

Answer 32

Reduce costs Pass the savings onto the customer Gain an advantage over competitors Greater profits Reduced long term unit costs Larger business scale

Question 33

Benefits of economies of scale to the consumer

Answer 33

Lower prices Product improvements Higher wages

Question 34

Name the 5 types of economies of scale

Answer 34

Purchasing Financial Managerial Technical Risk-bearing

Question 35

Explain purchasing economies of scale

Answer 35

It occurs when businesses are buying large quantities and are charged lower price per unit. This happens if the unit supplier costs are reduced or if the buyer has market power and can negotiate better deals

Question 36

Explain financial economies of scale

Answer 36

The increased size of the firm allows them to take advantage of lower interest rates. This means that they can borrow at a lower rate than smaller firms because lenders consider them as lower risk than financial firms

Question 37

Explain managerial economies of scale

Answer 37

As the firm grows in size, they become more able to specialise and perform division of labour. They can employ specialist managers and supervisors to perform specific management tasks, leading to increased worker efficiency which reduces average costs

Question 38

Explain Technical economies of scale

Answer 38

As the company expands larger and more efficient capital items can be used because their high costs can be spread across a larger quantity of output

Question 39

Explain risk-bearing economies of scale

Answer 39

Large firms can spread the risk of business failure across a wider range of products, markets, or investments. This means if one area performs poorly, others can compensate, making the overall business less risky.

Question 40

Define diseconomies of scale

Answer 40

When average costs rise during the increase of a firm's output.

Question 41

Why do diseconomies of scale occur

Answer 41

Loss of control Poor co-ordination Reduced worker motivation Poor communication

Question 42

Benefits of growth to a business

Answer 42

- Economies of scale - Increase in resources - More sales and market share - Ability to attract new customers or markets - Easier to influence the market price - Possible to increase profit

Question 43

Costs of growth to a business

Answer 43

- Diseconomies of scale - Larger businesses tend to be more complex - Cash shortages may occur - Increased production levels may lead to compromised quality - Increased negative externalities - Staff may become overworked and demotivated