Question

1. Explain the following terms:

1. economies of scale

2. point of inflection

3. sunk costs

4. marginal revenue

Please explain your thought process, as if you are explaining it to someone who knows nothing about economics.

Answer 1

Economies of scale – These are nothing but the cost which are realized by the companies in the situation where the production activity reaches the efficient level. These can be enjoyed by the companies only when they reduce their cost of production and on the other hand increase their production. Cost can be either a fixed cost or it can be variable cost also. Usually the size of a firm plays a vital role when deciding on the economies of scale because when firm is large in size then saving the cost becomes easy. Economies of scale can be realized internally as well as externally. Internal economies of scale are based on the decision of the management whereas external economies of scale of scale are dependent on the external factors.

Point of inflection – Point of inflection is a decisive moment wherein an economy faces a considerable change which can be positive as well as negative. This change is way more than any day to day changes happening in the economy and its generally extensive.

Sunk costs – The money which is already exhausted and it no case it can be retrieved is termed as the sunk cost. These costs are the costs which has already occurred in the past period. For example, the when any firm is doing a research in a new product, they invest certain amount of money in that, but they are not sure that the research will give a positive result. It can have a positive impact as well has negative impact, but the cost incurred while doing the research cannot be gained back.

Marginal revenue – Whenever there is a raise in the revenue due to the sale of one extra unit of product then it is termed as the marginal revenue. Basically, it helps the company to examine the revenue which they can earn after selling this additional product in the market. A firm whose goal is to maximize its profits will continue to produce its output till the point where marginal revenue equalizes with the marginal cost.