Chapter 22- costs, firms, revenue and objectives

Question 1

total cost

Answer 1

amount spent on FOP that’s used to produce a product

Question 2

ATC (average total cost)

Answer 2

total cost/ output (per unit cost)

[EOS because it decreases until a certain point and then starts increasing again because of DOS]

Question 3

Total fixed cost

Answer 3

costs which do not change with output in the short run (costs that don’t change with a difference in output)

eg: rent, maintenance, interest on loans

also called indirect or overheard cost

Question 4

AFC (average fixed cost)

Answer 4

Total fixed cost/ output

as TFC is constant, higher output will reduce AFC

Question 5

variable cost

Answer 5

cost that changes with output (direct cost)

eg: raw materials and electricity cost

Question 6

AVC (average variable cost)

Answer 6

AVC = TVC / output

as output increases, the AVC first decreases then increases

Question 7

ATC (average total cost)

Answer 7

AVC + AFC = ATC

if AVC and ATC are the same, there is no AFC- no rent and all

Question 8

fixed and variable cost (wages)

Answer 8

overtime- variable cost- bonus + commission

basic wage- fixed cost- fixed for a certain period of time

Question 9

Total cost (TC)

Answer 9

TC = FC + VC

Question 10

long run and short run

Answer 10

long run- all FOP can change/ vary so cost is variable

short run- fixed costs

Question 11

define revenue

Answer 11

money received by firms from selling their products- total amount earned by firms

Question 12

define total revenue

Answer 12

total amount of money received through the sale of products

price x quantity sold

Question 13

average revenue

Answer 13

same as price

total revenue/ output (quantity)

Question 14

competitive markets

Answer 14

each firm’s output may have no effect on price (perfect competition)
total revenue rises consistently as quantity sold increases
try to keep price constant because of perfect competition

(for diagrams- AR is always parallel to quantity in competitive markets)

Question 15

objectives of firms:

1. survival (in the market)

Answer 15

first objective of new firms
during difficulties, large firms also have the same objective

eg: during the pandemic

Question 16

objectives of firms:

2. growth

Answer 16

increase its size- internal or external

advantages: EOS, raising money easily, pay increases, job security, merging eliminates competition

Question 17

objectives of firms:

3. social welfare

Answer 17

SOE’s objectives
charge low prices
decisions based on social costs and benefits

private firms also consider costs and benefits (pollution, no child labour) to some extent

Question 18

objectives of firms:

4. profit sacrificing/ satisficing

Answer 18

sacrificing some profits to achieve other goals like investment in capital etc
sacrifices in the short run to achieve more in the long run

Question 19

objectives of firms:

5. profit maximisation

Answer 19

aim: seek profit
growth: in long term- profit, less competitors- less substitutes- PED reduces- price rises- revenue EOS (growth- AC reduces- revenue)

social welfare: long run- profit, SOEs- low price- more demand- revenue

Question 20

formulas (to go over)

Answer 20

revenue = cost + price
cost = revenue - profit
profit = revenue - cost
avg revenue = avg cost + avg profit (profit margin)
avg cost = avg revenue - avg profit
avg profit = avg revenue - avg cost