Firms' costs, revenue and objectives
| English | Chinese | Pinyin |
|---|---|---|
| profit | 利润 | lì rùn |
| variable costs | 可变成本 | kě biàn chéng běn |
| fixed costs | 固定成本 | gù dìng chéng běn |
| total cost | 总成本 | zǒng chéng běn |
| average cost | 平均成本 | píng jūn chéng běn |
| total revenue | 总收益 | zǒng shōu yì |
| economies of scale | 规模经济 | guī mó jīng jì |
| diseconomies | 规模不经济 | guī mó bù jīng jì |
What it really costs to make something
- Before a firm can price a product or judge its profit 利润, it must know its costs.
- Costs come in two kinds — and they behave very differently as output changes.
Which is a fixed cost?
Rent does not change with the level of output — a fixed cost.
Average cost equals total cost divided by ______.
AC = TC / quantity of output.
Fixed and variable costs 可变成本
- Fixed costs 固定成本 don't change with output: rent, insurance, loan interest.
- Variable costs rise with output: raw materials, wages, power.
- Total cost 总成本 = fixed + variable; average cost 平均成本 = total cost ÷ output.
Average cost is U-shaped: it falls as fixed costs spread, then rises as the firm overstretches.
Costs, revenue and the firm
Average cost falls then rises (a U shape); marginal cost crosses it at its lowest point. Firms watch these to decide output.
A firm sells 300 units at 4 each. What is total revenue?
Revenue = price × quantity = 4 × 300 = 1200.
Total revenue is 5000 and total cost is 3200. What is profit?
Profit = revenue − total cost = 5000 − 3200 = 1800.
Revenue and profit
- Total revenue 总收益 = price × quantity sold.
- Profit = total revenue − total cost. It is the entrepreneur's reward and main objective.
Worked example. A firm sells 200 units at 10 each → revenue = 2000. If total cost is 1500, profit = 500.
Economies of scale mean that, as a firm grows, its:
Bulk buying and spreading fixed costs lower average cost.
Economies of scale 规模经济
- As a firm grows, average cost falls — bulk buying, specialist machines, spreading fixed costs.
- Grow too big and average cost can rise again (diseconomies 规模不经济 — poor communication, low morale).
Fixed costs aren't "costs that never change ever." They're fixed with respect to output — you pay the same rent whether you make 1 unit or 1000. They still change over time (a rent review).
You've got it
- total cost = fixed + variable; average cost = TC ÷ output (U-shaped)
- revenue = price × quantity; profit = revenue − total cost
- growth brings economies of scale (lower average cost), then diseconomies