Firms’ costs, revenues and objectives (Copy)

3.7.1 Definition of Costs of Production

• Costs of production: The money a firm spends in making goods and services.
• They are the value of resources used up.

Types of Costs

1. Fixed Costs (FC)
   • Do not change with output.
   • Examples: rent, insurance, manager salaries.
   • Paid even if output = 0.
2. Variable Costs (VC)
   • Change directly with output.
   • Examples: raw materials, wages of hourly workers, electricity.
3. Total Cost (TC)
   • Overall cost of producing goods.
   • Formula: TC = FC + VC
4. Average Costs
   • Average Fixed Cost (AFC) = FC ÷ Q
   • Average Variable Cost (AVC) = VC ÷ Q
   • Average Total Cost (ATC) = TC ÷ Q
   • Also: ATC = AFC + AVC

3.7.2 Calculation of Costs of Production

Example Table

Diagrams

Total Cost Curve

Cost ($)
│        TC
│       /
│      /
│     /
│ FC /
│───/──────── Output (Q)

• TC starts at FC when Q=0.
• Increases as VC rises.

Average Cost Curves

Cost per unit
│   ATC
│    ╲
│     ╲
│      ╲
│ AFC   ╲ AVC
│───────────── Output (Q)

• AFC always falls as output increases.
• AVC usually falls then rises (U-shape).
• ATC = AFC + AVC, also U-shaped.

3.7.3 Definition of Revenue

• Revenue = Money a firm earns from sales.

Types:

1. Total Revenue (TR) = Price × Quantity
2. Average Revenue (AR) = TR ÷ Q
   • In most cases, AR = Price.

3.7.4 Calculation of Revenue

Example Table

• With constant price, TR increases steadily.
• AR remains equal to price.

Revenue Diagram

Revenue ($)
│        TR (straight line if price is constant)
│       /
│      /
│     /
│────/──────── Output (Q)

• TR is a straight line when price is fixed.
• AR is a horizontal line = price.

3.7.5 Objectives of Firms

1. Profit Maximisation
   • Aim: TR – TC is at its highest.
   • Traditional goal of firms.
2. Survival
   • Especially important in recessions or early years.
   • Aim to cover costs and avoid closure.
3. Growth
   • Expanding output, market share, or size.
   • Helps gain economies of scale.
4. Social Welfare / CSR
   • Benefit society as well as owners.
   • Examples: reducing pollution, fair wages, cheap public goods.

Diagram – Objectives of Firms

Objectives of Firms
 ┌─────────────┐
 │ Profit Max. │
 ├─────────────┤
 │ Survival    │
 ├─────────────┤
 │ Growth      │
 ├─────────────┤
 │ Social Care │
 └─────────────┘

Summary

• Costs: FC, VC, TC, AFC, AVC, ATC.
• Revenue: TR and AR.
• Objectives: profit, survival, growth, social responsibility.
• Diagrams: cost curves, TR line, AR line.