3.

7 Firms, Costs, Revenue and Objectives

3.7 Firms, Costs, Revenue and Objectives
3.7 Firms, Costs, Revenue and Objectives

Costs of Production
Fixed Cost
Fixed Cost (FC) are costs which do not
change with output in the short run.

These costs have to be paid regardless

whether or not the firm is producing any
goods or making any sales.
3.7 Firms, Costs, Revenue and Objectives

Costs of Production
Variable Costs
Variable Costs (VC) are costs
that change with output

Also referred to as direct costs.

They can be directly related to or

identified with a particular product.

Packaging costs
3.7 Firms, Costs, Revenue and Objectives

Fixed costs Variable costs

ceramic cups
sugar
chairs water paper cups
oven
coffee beans staff wages
electricity
3.7 Firms, Costs, Revenue and Objectives

Costs of Production
Total Costs
Total cost (TC) is the total Cost
amount that has to be spent on ($)

the factors of production used

to produce a product.

TC = Total Fixed Costs + Total Variable Costs

3.7 Firms, Costs, Revenue and Objectives
Average Total Costs Average Total Costs (ATC) is total cost
divided by output.

pg173
3.7 Firms, Costs, Revenue and Objectives
Average Total Costs Average Total Costs (ATC) is total cost
divided by output.

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100 140 28
100 70 17
100 210 14
3.7 Firms, Costs, Revenue and Objectives
Average Fixed Cost (AFC) is total
fixed cost divided by output.

Average
fixed cost

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100 140 28
100 70 17
100 210 14
3.7 Firms, Costs, Revenue and Objectives
Average Fixed Cost (AFC) is total
fixed cost divided by output.

Average
fixed cost

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100 140 28 20
100 70 17 10
100 210 14 6.7
3.7 Firms, Costs, Revenue and Objectives

Costs of Production
Average Fixed Cost
Average Fixed Cost (AFC) is total
fixed cost divided by output.

As total fixed cost

is constant, a
higher output will
reduce average
fixed costs.
3.7 Firms, Costs, Revenue and Objectives

Average Variable Costs (VC) is total

variable cost divided by output.

Average Average
variable cost
fixed cost

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100 140 28 20
100 70 17 10
100 210 14 6.7
3.7 Firms, Costs, Revenue and Objectives

Average Variable Costs (VC) is total

variable cost divided by output.

Average Average
Average
variable
variablecost
cost
fixed cost

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100 140 28 20 8
100 70 17 10 7
100 210 14 6.7 7.3
3.7 Firms, Costs, Revenue and Objectives
Average Variable Costs
Average Variable Costs (VC) is total
variable cost divided by output.

As output increases in the short run,

AVC tends to fall and then rise.

- Overtime pay per hour can be 1.5 or 2 x normal

pay

- Flexible workers may be less productive or

incur training costs

- Increased demand for raw materials can raise

prices
3.7 Firms, Costs, Revenue and Objectives

Revenue
Total and Average Revenue
Total Revenue (TR) is the total amount of
money received from a selling a product.

Average Revenue (AR) is found by dividing

total revenue by the quantity sold
- i.e. it is the same as price.

Profit is TR - TC
3.7 Firms, Costs, Revenue and Objectives
Total and Average Revenue
Total Revenue (TR) is the total amount of
money received from a selling a product.
Average Revenue (AR) is found by dividing
total revenue by the quantity sold
- i.e. it is the same as price.
Total Revenue Average Revenue
3.7 Firms, Costs, Revenue and Objectives
Total and Average Revenue
Total Revenue (TR) is the total amount of
money received from a selling a product.
Average Revenue (AR) is found by dividing
total revenue by the quantity sold
- i.e. it is the same as price.

Total Revenue Average Revenue

500 10
576 8
540 6
440 4
2
250
3.7 Firms, Costs, Revenue and Objectives
Profit
3.7 Firms, Costs, Revenue and Objectives

Objectives of Firms
Firms pursue a range of objectives including:

▪ Survival

▪ Growth

▪ Social Welfare

▪ Profit Maximisation
3.7 Firms, Costs, Revenue and Objectives

Objectives of Firms
Firms pursue a range of objectives including:

▪ Survival
When firms start, their initial objective
may be just to survive in what may be a
very competitive market.
3.7 Firms, Costs, Revenue and Objectives

Objectives of Firms
Firms pursue a range of objectives including:

▪ Survival

▪ Growth
Increasing the size of the firm may help to
achieve economies of scale. It may also

▪ Increased sales and market share

▪ Gain ability to diversify

▪ Improved chances of survival

3.7 Firms, Costs, Revenue and Objectives

Objectives of Firms
Firms pursue a range of objectives including:

▪ Survival

▪ Growth

▪ Social Welfare
Showing concern about the environmental
and social effects of production.

State-owned enterprises may be given

this objective by the government.
3.7 Firms, Costs, Revenue and Objectives

Objectives of Firms
Firms pursue a range of objectives including:

▪ Profit maximisation is making as much

profit as possible.

This involves maximising the difference

between total cost and total revenue.

Profit becomes a measure of success.

Firms that are profitable will have an

easier time to obtain external finance.