CHAPTER 8:

Firms, Cost, and Profits

TABLES AND FIGURES

 Table 8.1 Profit and Loss Account for XYZ Company
For the Year Ending 31 December 1999

Expenditure Income

Variable Costs Revenue from sales £1,000,000

Wages £200,000

Materials 300,000

Other 100,000

Total VC 600,000

Fixed Costs

Rent 50,000

Managerial salaries 60,000

Interest on loans 90,000

Depreciation allowance 50,000

Total FC 250,000

Total Costs 850,000

Profit 150,000
 Table 8.2 Calculation of Pure Profits

Profits as reported by the firm £150,000

Opportunity cost of capital

Pure return on the firm’s capital -£100,000

Risk Premium -£40,000

Pure or economic rent £10,000

 Table 8.3 Total, Average and Marginal Products in the Short Run

Quantity of Total Product Average Marginal

labour [L] [TP] Product [AP] Product [MP]

[1] [2] [3] [4]

1 43 43 43

2 160 80 117

3 351 117 191

4 600 150 249

5 875 175 275

6 1152 192 277

7 1375 196 220

8 1536 192 164

9 1656 184 120

10 1750 175 94

11 1815 165 65

12 1860 155 45
 Figure 8.1 Total, Average and Marginal Product Curves

2100

Average product [AP] and marginal product [MP]

300 Point of diminishing
TP marginal returns
1800
250
Total product [T/P]

1500
200
1200 AP
150
900
Point of diminishing
average returns
100
600 MP

50
300

0 2 4 6 8 10 12 2 4 6 8 10 12
Quantity of Labour
Quantity of labour

[i] Total Product [ii] Average and Marginal Product

 Table 8.4 Variation of Costs With Capital Fixed and Labour Variable

Inputs Total Cost Average Cost

Capital Labour Output Fixed Variable Total Fixed Variable Total Marginal
[L] [q] [TFC] [TVC] [TC] [AFC] [AVC] [ATC] Product [MP]

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]

10 1 43 £100 £20 £120 £2,326 £0.465 £2,791 £0.465

10 2 160 100 40 140 0.625 0.250 0.875 0.171

10 3 351 100 60 160 0.285 0.171 0.456 0.105

 Figure 8.3 Total, Average and Marginal Cost Curves

280 TC

240 TVC 0.70

Cost per unit [[£]

0.60
200
Cost [£]

0.50
160 MC
0.40
120
TFC 0.30

80 0.20 ATC

40 0.10 AVC
AFC

300 600 900 1200 1500 1800 2100 300 600 900 1200 1500 1800 2100
Output Output

[i] Total cost curves [ii] Marginal and average cost curves
 Figure 8.4 A Long-run Average Cost-curve

LRAC

Attainable levels of cost

Cost per unit

Unattainable levels of cost

qm
0

Output per period

 Figure 8.4 A Long-run Average Cost-curve

c0 E0 LRAC

Attainable levels of cost

Cost per unit

Unattainable levels of cost

q0 qm
0

Output per period

 Figure 8.4 A Long-run Average Cost-curve

c2

c0 E0 LRAC

c1 E1
Attainable levels of cost
Cost per unit

Unattainable levels of cost

q0 q1 qm
0

Output per period

 Figure 8.5 Long-run Average Cost and Short-run
Average Cost Curves
Cost per unit

qm

Output per period

 Figure 8.5 Long-run Average Cost and Short-run
Average Cost Curves
Cost per unit

SRATC
LRAC
c0

q0 qm

Output per period

 Figure 8.6 The Envelope Long-run Average Cost Curve
Cost per unit

LRAC

Output per period

 Figure 8.6 The Envelope Long-run Average Cost Curve
Cost per unit

SRATC

LRAC

c0

q0

Output per period

 Figure 8.6 The Envelope Long-run Average Cost Curve
Cost per unit

SRATC

LRAC

c0

q0

Output per period

 Figure 8.6 The Envelope Long-run Average Cost Curve
Cost per unit

SRATC
SRATC
LRAC

c0

q0

Output per period

 Figure 8.6 The Envelope Long-run Average Cost Curve
Cost per unit

SRATC
SRATC
LRAC

c0

q0

Output per period

 Figure 8.6 The Envelope Long-run Average Cost Curve
Cost per unit

SRATC
SRATC
LRAC

c0

q0 qm

Output per period