Business Costs, Revenues & Profit (Edexcel IGCSE Economics): Flashcards
Exam code: 4EC1
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Define fixed costs.
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Define fixed costs.
Fixed costs are costs that do not change as the level of output changes, such as rent, insurance and management salaries.
Define variable costs.
Variable costs are costs that vary directly with output, such as raw materials and the wages of workers directly involved in production.
Define total cost.
Total cost is the sum of total fixed costs and total variable costs.
Define total revenue.
Total revenue is the total value of all sales a firm generates, calculated as selling price multiplied by quantity sold.
Define average revenue.
Average revenue is the overall revenue per unit, and is the technical economic name for price.
What is the formula for average total cost?
The formula for average total cost is total cost divided by quantity (TC ÷ Q).
What is the formula for total variable cost?
Total variable cost is calculated as variable cost per unit multiplied by quantity (VC × Q).
When does a firm break even?
A firm breaks even when total revenue equals total costs (TR = TC), covering all its costs without making a profit or a loss.
How is profit calculated?
Profit is calculated as total revenue minus total costs (TR − TC).
True or False?
Total costs can never be zero because all firms have some fixed costs.
True.
Even at zero output a firm must still pay its fixed costs, so total costs can never fall to zero.
True or False?
Fixed costs increase as output increases.
False.
Fixed costs stay the same regardless of output; it is variable costs that increase as output increases.
Average revenue is the technical economic name for .
Average revenue is the technical economic name for price.
Average revenue is especially useful to a firm selling products, such as a supermarket.
Average revenue is especially useful to a firm selling multiple products, such as a supermarket.
Define economies of scale.
Economies of scale are the efficiencies a firm gains as it increases its scale of output, which lower its average cost of production.
Define diseconomies of scale.
Diseconomies of scale occur when a firm increases its scale of output beyond a certain point, causing its average costs to rise.
Define internal economies of scale.
Internal economies of scale occur as a result of the growth in the scale of production within the firm itself.
Define external economies of scale.
External economies of scale arise from external changes in the locality and industry that lower a firm's average costs as the industry grows.
Define internal diseconomies of scale.
Internal diseconomies of scale occur when an increase in the scale of output raises the cost per unit due to factors generated inside the business.
How does a purchasing economy of scale lower average cost?
A purchasing economy of scale lowers average cost because large firms buy raw materials in greater volumes and receive a bulk purchase discount.
Why do large firms enjoy a financial economy of scale?
Large firms enjoy a financial economy of scale because they often receive lower interest rates on loans, as they are perceived as less risky.
Give one source of external economies of scale.
One source of external economies of scale is a local supply of skilled labour, as local educational establishments train workers for the industry.
How does bureaucracy create a diseconomy of scale?
Bureaucracy creates a diseconomy of scale because significant paperwork, rules and regulations slow down decision making and production, raising average cost.
True or False?
Economies of scale cause a firm's average costs to rise.
False.
Economies of scale lower a firm's average cost of production; it is diseconomies of scale that raise average costs.
True or False?
External economies of scale result from the growth of the whole industry rather than the individual firm.
True.
External economies of scale come from changes in the locality and industry, whereas internal economies of scale come from the growth of the firm itself.
Managerial economies of scale occur when large firms employ managers who are more efficient at certain tasks.
Managerial economies of scale occur when large firms employ specialist managers who are more efficient at certain tasks.
Internal diseconomies of scale cause the average cost per unit to .
Internal diseconomies of scale cause the average cost per unit to rise.
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