Revenue, Costs And Profits 3.3

Front 1

Total Revenue (TR)

Back 1

The total amount of money coming into the business through the sale of goods and services.

Front 2

Average Revenue (AR)

Back 2

Demand is equal to AR, total revenue/output.

Front 3

Marginal Revenue

Back 3

The extra revenue that the firm earns from selling one more unit of production. Change in total revenue/ change in output.

Front 4

Marginal Revenue Values

Back 4

If MR is positive, when the firm sells the product at a lower price, TR still grows so the demand curve is elastic. If MR=0, TR is maximised and the demand curve is Unitary elastic. If MR is negative, TR decreases as the price decreases so the demand curve is inelastic.

Front 5

Total Cost (TC)

Back 5

The cost of producing a given level of output. Fixed + Variable costs.

Front 6

Total Fixed Costs (TFC)

Back 6

Costs that do not change with output and remain constant

Front 7

Total Variable Cost (TVC)

Back 7

Costs that change directly with output e.g materials

Front 8

Average (total) cost (ATC)

Back 8

Total costs/output

Front 9

Marginal Cost (MC)

Back 9

The extra cost of producing one extra unit of a good, change in total cost/change in output.

Front 10

The Law of Diminishing Returns

Back 10

If a buisness decides to expand, more workers can be added relatively easily and this will lead to increase in production. However it will take a long time for the factory to expand and adding more labour only means they have less impact on the amount of goods produced as they have no machines to use. This only occurs in the SR (one or more factors of production are fixed)

Front 11

The relationship between SR and LR cost curves.

Back 11

SRAC curves are U-shaped due to the law of diminishing returns whilst LRAC are U-shaped due to economies and diseconomies of scale.

Front 12

Economies of scale

Back 12

The advantages of large scale production that enable a large business to produce at a lower AC than a smaller business.

Front 13

Diseconomies of Scale

Back 13

The disadvantages that arise in large buisnesses that reduce efficency and cause AC to rise. The firm experiences decreasing returns to scale.

Front 14

Constant returns to scale

Back 14

Where firms increase inputs and recieve an increase in output by the same percentage.

Front 15

The minimum efficent scale

Back 15

The minimum level of output needed for a business to fully exploit economies of scale.

Front 16

Internal economies of scale

Back 16

An internal economy of scale is an advantage that a firm is able to enjoy because of a growth in the firm, independent of anything happening to other firms or the industy.

Front 17

Technical economies (Internal economies of scale)

Back 17

These arise as a result of what happens to the production process: Specialisation, R&D, Capital investment.

Front 18

Financial economies (Internal economies of scale)

Back 18

Large firms have a greater security because they have more assets and are therefore less likely to be forced out of business overnight. It is easier for them to obtain finance and interest rates will be lower on loans etc.

Front 19

Risk bearing economies (Internal economies of scale)

Back 19

Large companies are able to operate in a range of different markets, producing different products which means that if one area fails, the entire business will not collapse.

Front 20

Purchasing economies (Internal economies of scale)

Back 20

Buying in bulk and distribution (preferential rates from transport companies).

Front 21

External economies of scale

Back 21

An external economy of scale is an advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself.

Front 22

Labour (External economies of scale)

Back 22

Business established in an area with other successful firms from the samen industry find that labour tends to come to that area if they want a job in that industry.

Front 23

Support services (External economies of scale)

Back 23

Businesses who provide products or services for large business will naturally move to the area where those businesses are based, which reduces transport cost/time delays for the business.

Front 24

Management (Diseconomies of Scale)

Back 24

Coordination, control and communication.

Front 25

Normal Profit

Back 25

The return that is sufficent to keep the factors of production committed to the business. In economics, costs include the level of profit needed to keep the producer in the market and to cover the opportunity cost.

Front 26

Supernormal Profit

Back 26

The profit is greater than normal profit, this occurs where AR>AC or TR>TC.

Front 27

Supernormal Profit

Back 27

The profit is greater than normal profit, this occurs where AR>AC or TR>TC.