Chapter 22: Firms, costs, revenue and objectives Flashcards
Total cost
The total amount that has to be spent on the factors of production used to produce a product.
Average total cost
Total cost divided by output.
Fixed costs
Costs which do not change with output in the short run.
Average fixed cost
Total fixed cost divided by output.
Variable costs
Costs that change with output.
Average variable cost
Total variable cost divided by output.
Price
The amount of money that has to be given to obtain a product.
Total revenue
The total amount of money received from selling a product.
Average revenue
The total revenue divided by the quantity sold.
Objectives of firms: Survival
When firms are started, their initial objective may be just to survive in what may be a very competitive market. A firm may be content to just cover its costs until it can become better known. During difficult times when demand is falling, even large firms may have survival as their key objective. They will try to stay in the market in the hope that conditions will improve.
Objectives of firms: Growth
Some firms may pursue the objective of growth. Increasing the size of the firm may bring a number of advantages. High and expanding sales tend to enable firms to take advantage of a number of internal economies of scale and so, for instance, to raise finance more easily to buy raw materials at a discounted rate.
Objectives of firms: Social welfare
State-owned enterprises may be given by the government the objective of improving social welfare. They may, for instance, charge a relatively low price for their products to ensure they are affordable to even the poor. They are more likely than private sector firms to base their production decisions on social costs and benefits.
Objectives of firms: Profit satisficing
In some cases, firms may engage in what economists call profit satisficing. This involves making enough dividends to keep shareholders happy while pursuing other objectives. For example, a firm may be prepared to sacrifice some profit, at least in the short run, in order to improve staff facilities or to get their raw materials from more sustainable sources.
Objectives of firms: Profit maximisation
read textbook
