Chapter 22- Firms, Costs, Revenue and Objectives Flashcards
Total cost
the total amount that has to be spent on factors of production used to produce a product
Average Total Cost
total cost divided by the output
the curve is usually u shaped
as a firm alters its scale of production, it first experiences economies of scale and then after reaching a certain output, may encounter diseconomies of scale
Fixed Costs
costs that don’t change with output in the short run. When a firm changes its output, the costs of these factors remain unchanged> Eg: if a firm is closed for a holiday, it still has to pay rent
Average Fixed Costs
total fixed costs divided by output. As total fixed cost is constant, a higher output will reduce average fixed cost
Variable Costs
costs that change with output
Eg: increased production and sale of cars will result in increased expenditure on component parts, electricity, wages and transport for a car firm.
Average variable cost
total variable cost divided by output. As output increases in the short run, average variable cost tends to fall and then rise
Long Run
The time period when all factors of production can be changed and all costs are variable
Price
the amount of money that has to be given to obtain a product
Total Revenue
total amount of money received from selling a single product
in very competitive markets each firm’s output has no effect on price. In this case total revenue rises consistently as more quantity is sold. However, in most other markets firms are price makers and need to lower price to sell more.
Average Revenue
the total revenue divided by the quantity sold
Profit Satisficing
sacrificing some profit to achieve other goals
Profit Maximisation
making as much profit as possible
Fixed and Variable Costs
Overtime payments and wages of temporary workers are regarded as variable costs as they change with output. the basic wage or salary paid to workers is a fixed cost as it has to be paid regardless of the output. total costs is the sum of fixed costs and variable costs. In the long run all costs are variable as all factors of production can be altered with sufficient time.
Objectives of Firms
Survival: content to cover its costs until it can become better known. it is the main objective when demand is falling
Growth leading to internal economies of scale
Social Welfare: goal of SOEs
Profit Satisficing: making enough dividends to keep share holders happy while pursuing other objectives. Eg: firms may be willing to sacrifice some profit in short run improve staff
Profit Maximization
