Chapter 22: Firms, Costs, Revenue and Objectives

COST
Total Cost = Variable Costs + Fixed Cost
Variable Cost (Total Variable Cost)= Costs which vary with production
Fixed Cost = These costs do not change with output in the short run

Average Cost (Average total cost) = Total cost/ Total output = Cost per unit
Average Variable Cost = Variable Cost/ Total output
Average Fixed Cost = Fixed Cost / Total Output
*Average fixed decreases as output increase

TC = VC + FC 100 = 0 + 100 VC= 0 TC=FC

*In the long-run there are no fixed costs only variable

REVENUE (Sales)
=Price * Output $5 * 500 units = $2500
Average revenue = Total revenue / Total output units
2500/500 = $5
Objectives of firms
1. Survival
2. Growth (internal & external)
3. Social Welfare (Non-profit organization) backed by Government
4. Profit satisficing (Make enough profits to satisfy shareholders)
5. Profit maximization

Profit = Revenue – Cost

Cost = Revenue – profit
Profits can be increased by increasing revenue and lowering costs.
Revenue can be increased by increasing prices, adapting more quickly to changes in demand and
advertising.

Costs can lowered by reducing wastage and improving efficiency, raising productivity and increase
the scale of production (economies of scale).