Exam code: 0455 & 0987
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Define fixed costs (FC).
Fixed costs (FC) are costs that do not change as the level of output changes. They have to be paid whether output is zero or at a high level.
Define variable costs (VC).
Variable costs (VC) are costs that vary directly with output. They increase as output increases and decrease as output decreases.
Define total costs (TC).
Total costs (TC) are the sum of fixed costs and variable costs incurred by a firm in production.
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Define fixed costs (FC).
Fixed costs (FC) are costs that do not change as the level of output changes. They have to be paid whether output is zero or at a high level.
Define variable costs (VC).
Variable costs (VC) are costs that vary directly with output. They increase as output increases and decrease as output decreases.
Define total costs (TC).
Total costs (TC) are the sum of fixed costs and variable costs incurred by a firm in production.
Average total cost (ATC) is calculated as divided by .
Average total cost (ATC) is calculated as total cost (TC) divided by quantity (Q).
Total variable cost (TVC) is equal to variable cost (VC) times .
Total variable cost (TVC) is equal to variable cost (VC) times quantity (Q).
Average fixed cost (AFC) is calculated as divided by .
Average fixed cost (AFC) is calculated as total fixed costs (TFC) divided by quantity (Q).
Give two examples of fixed costs for a firm.
Examples of fixed costs include building rent and management salaries.
What happens to variable costs as output increases?
As output increases, variable costs increase.
What shape does the fixed cost curve have on a cost diagram?
The fixed cost curve is a horizontal line because fixed costs do not change with output.
True or False?
The total cost of a firm can be zero if it produces nothing.
False.
The total cost cannot be zero because fixed costs must still be paid even if output is zero.
What happens to average fixed cost (AFC) as a firm increases its output?
As output increases, average fixed cost (AFC) decreases because the fixed cost is spread over more units.
What is meant by economies of scale in the context of average total cost?
Economies of scale are efficiencies that lower the average total cost (ATC) as scale of output increases.
What causes the average total cost (ATC) to rise after a certain point as output increases?
The rise in average total cost (ATC) after a certain level of output is caused by diseconomies of scale.
Define revenue.
Revenue is the income a firm earns from selling its goods or services over a period of time.
Define total revenue (TR).
Total revenue (TR) is the total amount of money received from selling all output.
Define average revenue (AR).
Average revenue (AR) is the revenue earned per unit sold.
How is average revenue (AR) calculated?
Average revenue (AR) is calculated by dividing total revenue (TR) by the quantity sold (Q): AR = TR ÷ Q.
True or False?
If sales volume increases and price stays the same, total revenue will increase.
True.
Total revenue increases if more units are sold at the same price, because TR = price × quantity sold.
What happens to a firm's total revenue in an elastic market if it lowers its price?
In an elastic market, lowering price usually leads to a larger increase in sales, so total revenue increases.
How does understanding the relationship between sales volume and revenue help businesses make decisions?
Knowing how sales volume affects revenue helps businesses set prices, plan output, and forecast profits more accurately.
Define business objective.
A business objective is the reason for a firm’s existence or the desired focus set by its owners.
What are three common objectives of firms?
Common objectives of firms include profit maximisation, growth and survival.
A firm’s objectives can over time as the business develops.
A firm’s objectives can change over time as the business develops.
Define profit maximisation.
Profit maximisation is the objective of a firm to achieve the highest possible profit, calculated as total revenue minus total costs.
To maximise profit, a firm can increase its or decrease its .
To maximise profit, a firm can increase its sales revenue or decrease its costs.
What metrics can firms use to measure growth?
Firms can measure growth by the number of employees, market share, size of profits and market capitalisation.
True or False?
A growing firm is less likely to fail than a firm that is not growing.
True.
Growth increases a firm’s chances of survival and makes it less likely to fail.
In the short term, many new firms focus on , with as much as 25% failing in their first year.
In the short term, many new firms focus on survival, with as much as 25% failing in their first year.
Define social welfare objective.
A social welfare objective is a business aim that focuses on improving society, such as promoting climate action or reducing inequality.
How did Luckin Coffee’s objectives change from 2017 to 2023?
Luckin Coffee’s objectives changed from survival (2017) to growth (2019), then to profit maximisation (2020), and finally to social welfare (2023).