Chapter 22- costs, firms, revenue and objectives Flashcards
total cost
amount spent on FOP that’s used to produce a product
ATC (average total cost)
total cost/ output (per unit cost)
[EOS because it decreases until a certain point and then starts increasing again because of DOS]
Total fixed cost
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
AFC (average fixed cost)
Total fixed cost/ output
as TFC is constant, higher output will reduce AFC
variable cost
cost that changes with output (direct cost)
eg: raw materials and electricity cost
AVC (average variable cost)
AVC = TVC / output
as output increases, the AVC first decreases then increases
ATC (average total cost)
AVC + AFC = ATC
if AVC and ATC are the same, there is no AFC- no rent and all
fixed and variable cost (wages)
overtime- variable cost- bonus + commission
basic wage- fixed cost- fixed for a certain period of time
Total cost (TC)
TC = FC + VC
long run and short run
long run- all FOP can change/ vary so cost is variable
short run- fixed costs
define revenue
money received by firms from selling their products- total amount earned by firms
define total revenue
total amount of money received through the sale of products
price x quantity sold
average revenue
same as price
total revenue/ output (quantity)
competitive markets
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)
objectives of firms:
1. survival (in the market)
first objective of new firms
during difficulties, large firms also have the same objective
eg: during the pandemic
objectives of firms:
2. growth
increase its size- internal or external
advantages: EOS, raising money easily, pay increases, job security, merging eliminates competition
objectives of firms:
3. social welfare
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
objectives of firms:
4. profit sacrificing/ satisficing
sacrificing some profits to achieve other goals like investment in capital etc
sacrifices in the short run to achieve more in the long run
objectives of firms:
5. profit maximisation
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
formulas (to go over)
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
