SimpleStudy® 3.3 Revenues, Costs & Profits @ sro a 3.3 Revenues, Costs & Profits 3.3.1 Revenue Revenue is the income generated from normal business operations and includes discounts and deductions for returned goods. It is critical to understand the various concepts related t revenue which help determine the financial health of a business: + Total Revenue (TR): This is the total income from sales of goods or services. It is calculate: by multiplying the quantity sold (Q) by the price (P) of the good or service (TR = P = Q). + Average Revenue (AR): This is the revenue generated per unit of output sold. It is equal to total revenue divided by the quantity sold (AR = TR / Q). * Marginal Revenue (MR): This refers to the additional revenue that one more unit of output generates (MR = ATR / AQ). Revenue can be affected by the price elasticity of demand, as it relates to the responsivenes of consumers to changes in price. Analyzing the price elasticity of demand is essential for setting prices and understanding the potential impact on revenue. 3.3.2 Costs Costs are the expenses that firms incur in producing goods or services. They're categorically split into various types which are essential in determining profitability: Total Cost (TC): The sum of all costs incurred by a business in producing a certain level of output. * Total Fixed Cost (TFC): Costs that do not change with the level of output (e.g, rent, salaries). * Total Variable Cost (TVC): Costs that vary directly with the level of output (e.g, raw materials). * Average Cost or Average Total Cost (ATC): The total cost per unit of output, calculated by dividing total cost by the quantity produced (ATC = TC / Q). + Average Fixed Cost (AFC): The total fixed cost per unit of output (AFC = TFC / Q) * Average Variable Cost (AVC): The total variable cost per unit of output (AVC = TVC / Q). Marginal Cost (MC): The additional cost of producing one more unit of output (MC = ATC AQ). In the short run, cost curves can be derived assuming the law of diminishing marginal productivity, which states that adding an additional factor of production results in smaller increases in output. The relationship between short-run and long-run average cost curves reflects economies and diseconomies of scale. 3.3.3 Economies & Diseconomies of ScaleEconomies of scale are the cost advantages that a business can exploit by expanding their size of operation. Diseconomies of scale, on the other hand, are the forces that cause larger firms to produce goods and services at increased per-unit costs. + Types of Economies of Scale: + Technical economies due to increased production efficiency. + Managerial economies from specialized managers. + Financial economies due to better borrowing terms. + Marketing economies from spreading the cost of advertising, + Network economies from an expanding user base. + Types of Diseconomies of Scale: + Communication difficulties in larger organizations + Lack of motivation among employees. * Slower decision-making due to complex bureaucracy. + Inefficient management or poor coordination between departments. * Minimum Efficient Scale (MES): possible per unit cost. * Distinction between Internal and External Economies of Scale: * Internal economies are controllable by the firm and result from within the firm. + External economies arise from outside factors such as industry growth. ‘int at which a firm can produce its product at the lowes 3.3.4 Normal Profits, Supernormal Profits & Losses + Normal Profit: The minimum profit necessary to keep a firm in operation; equivalent to the opportunity cost of capital. + Supernormal Profit (Abnormal Profit): Profit over and above normal profit. + Losses: Occur when a firm's total revenue does not cover total costs, including opportunity costs.