3.3 Revenues, Costs & Profits (Edexcel A Level Economics A)

True.

AR is the demand curve.

The gradient of the MR curve is twice as steep as the AR curve in monopolistic competition.

Fixed costs are costs that do not change with the level of output.

Variable costs are costs that change directly with the level of output.

Marginal cost is the cost of producing an additional unit of output.

Total costs (TC) are calculated using the formula:

Average total cost (AC) is calculated using the formula:

The short-run is a period of time in which at least one factor of production is fixed.

The long-run is a period of time in which all of the factors of production are variable.

The law of diminishing marginal productivity states that in the short run, as more of a variable factor is added to fixed factors, there will initially be an increase in productivity. A point will be reached where adding additional units begins to decrease productivity.

The shapes of short-run cost curves (AC, AVC & MC) are determined by the law of diminishing marginal productivity.

There is an inverse relationship between marginal product and marginal costs. As marginal product increases, marginal costs decrease.

The MC curve crosses the AVC and AC curves at their lowest points.

The long-run average cost curve (LRAC) is the line of best fit between the lowest points of the short-run ATC (SRAC) curves.

Economies of scale are the benefits a firm receives from increasing its levels of output in the long run. This causes its long-run average total costs (LRAC) to decrease.

Diseconomies of scale are an increase in long-run average total costs (LRAC). This is caused by a firm increasing its level of output beyond the point of its lowest LRAC.

Increasing returns to scale occur when a firm is enjoying economies of scale.

Decreasing returns to scale occur when a firm is facing diseconomies of scale.

The minimum efficient scale is the lowest cost point on a long-run average total cost (LRAC) curve.

False.

Economies of scale can be internal or external.

External economies of scale occur when there is an increase in the size of the industry in which the firm operates. This allows the firm to benefit from lower LRAC generated by factors outside of the firm.

A geographical cluster contributes to external economies of scale as supporting firms move closer to major businesses. This cuts costs and generates more sales, lowering the LRAC. An example is Silicon Valley in California, USA.

An increase in skilled labour can lower the cost of skilled labour. This decreases the LRAC which is a source of external economies of scale.

Favourable legislation can generate significant reductions in LRAC. Governments may support some industries helping them gain external economies of scale.

True.

Increasing and decreasing returns to scale only happen in the long run.

Economies and diseconomies of scale determine the shape of long-run cost curves.

The condition for profit maximisation is that a firm has to produce at the level of output where marginal cost (MC) = marginal revenue (MR).

Direct costs can be traced to the production of a good or service, such as raw materials and wages.

Implicit costs cannot be matched against a product because they need to be paid whether or not production takes place. For example, rent on premises.

Profit is calculated using the formula:

Normal profit occurs when total revenue (TR) = total costs (TC). It is the minimum amount of profit a firm must make to remain in the industry in the long-run.

Supernormal profit occurs when total revenue (TR) is greater than total costs (TC).

A loss occurs when total revenue (TR) is less than total costs (TC).

The short-run shut down point is when the selling price (average revenue) equals the average variable cost (AVC).

A firm should shut down in the short-run if the selling price (AR) is below the average variable cost (AVC).

The long-run shut down point is when the selling price (AR) is equal to or below the average total cost (AC).

False.

A firm may continue operating in the short run if Average Revenue (AR)>Average Variable Costs (AVC), even though it is not covering its fixed costs.

Direct and indirect costs of production are considered when calculating profits.