Firms and Production

Costs, revenue and objectives

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 CAIE Objective of Firms and Production
Topic
3.6.1 demand for factors of production
3.6.2 labour-intensive and capital-intensive
production
3.6.3 production and productivity
Guidance
Influences to include demand for the product,
the price of different factors of production, their
availability and their productivity.
The reasons for adopting the different forms of
production and their advantages and disadvantages.
The difference between, and influences on,
production and productivity.
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Agenda
 Cost Concepts

 Revenue Concepts

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Video links for TC
 https://www.youtube.com/watch?v=ucJ
BO9UTmwo

 https://www.youtube.com/watch?
v=qYKJdooEnwU

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Types of Costs
 Variable Costs
 These costs exist only if production occurs.
 E.g., fuel for tractor, seed, etc.
 Fixed Costs
 These cost exist whether production occurs or not.
 In the long-run there are no fixed costs.
 Can be both cash and non-cash expenses.
 E.g., depreciation on tractors and buildings, etc.

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Cost Concepts
 Total Fixed Costs (TFC)
 The summation of all fixed and sunk costs to
production.
 Total Variable Costs (TVC)
 The summation of all variable costs to production.
 Total Costs (TC)
 The summation of total fixed and total variable
costs.
 TC=TFC+TVC

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Cost Concepts Cont.
 Average Fixed Costs (AFC)
 The total fixed costs divided by output.
 Average Variable Costs (AVC)
 The total variable costs divided by output.
 Average Total Costs (ATC)
 The total costs divided by output.
 The summation of average fixed costs and
average variable costs, i.e., ATC=AFC+AVC.

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Cost Concepts Cont.
 Marginal Costs
 The change in total costs divided by the
change in output.
 TC/Y
 The change in total variable costs divided
by the change in output.
 TVC/Y

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Revenue Concepts
 Revenue (TR) is defined as the output
price (py) multiplied by the quantity (Y).
 Average revenue (AR) equals total
revenue divided by output (Y), i.e.,
TR/Y, which equals py.
 Marginal Revenue is the change in total
revenue divided by the change in
output, i.e., TR/Y.

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