Firms’ costs, revenues and objectives (Copy)
3.7 Firms’ Costs, Revenue and Objectives
3.7.1 Definition of Costs of Production
- Fixed Costs (FC): Do not change with output. (e.g., rent, insurance).
- Variable Costs (VC): Change with output. (e.g., raw materials, wages).
- Total Cost (TC) = FC + VC.
- Average Total Cost (ATC) = TC ÷ Output.
- Average Fixed Cost (AFC) = FC ÷ Output.
- Average Variable Cost (AVC) = VC ÷ Output.
3.7.2 Calculation of Costs of Production
| Output (units) | FC ($) | VC ($) | TC ($) | AFC ($) | AVC ($) | ATC ($) |
|---|---|---|---|---|---|---|
| 0 | 100 | 0 | 100 | – | – | – |
| 10 | 100 | 200 | 300 | 10 | 20 | 30 |
| 20 | 100 | 360 | 460 | 5 | 18 | 23 |
- As output increases:
- AFC falls (spread over more units).
- AVC may fall initially (efficiency) then rise (diminishing returns).
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
3.7.3 Definition of Revenue
- Revenue = Income a firm earns from selling goods/services.
- Total Revenue (TR) = Price × Quantity sold.
- Average Revenue (AR) = TR ÷ Quantity = Price (since AR = price per unit).
3.7.4 Calculation of Revenue
| Price ($) | Quantity Sold | TR ($) | AR ($) |
|---|---|---|---|
| 10 | 20 | 200 | 10 |
| 8 | 30 | 240 | 8 |
| 6 | 40 | 240 | 6 |
- AR always equals price.
- TR rises as more sold, but may eventually fall if price cuts reduce overall income.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
3.7.5 Objectives of Firms
| Objective | Meaning | Example |
|---|---|---|
| Profit maximisation | Produce output where revenue – cost is highest | Tech firms aiming for high margins |
| Growth | Expand market share, size, output | Amazon diversifying |
| Survival | Short-term aim during recession | Small shops during COVID |
| Social welfare | Prioritise community/ethical goals | Social enterprises, public sector |
- In real life, firms often balance multiple objectives depending on market conditions.
Quick Examples for Exams
- FC = $500 rent, VC = $5 per unit. At 100 units, TC = 500 + (5×100) = $1000.
- Firm sells 50 units at $20 each → TR = 20×50 = $1000, AR = $20.
- Startup firm may first aim for survival before pursuing growth.
- Government-owned firms may prioritise social welfare (public transport).
Memory Hooks
- Costs: FC (fixed), VC (variable), TC (total), ATC (average), AFC, AVC.
- Revenue: TR = P×Q, AR = TR ÷ Q = P.
- Objectives = Profit, Growth, Survival, Welfare (PGSW).
- Rule: AFC always falls as output rises.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course