Firms' costs, revenue and objectives
Costs and revenue
- fixed costs don't change with output (rent); variable costs do (materials).
- total cost = fixed + variable; average cost = total cost ÷ units.
- total revenue = price × quantity sold; average revenue = revenue ÷ units = the price.
Practice
Which is a fixed cost?
Fixed costs (rent) do not change with output; variable costs (materials, power) do.
Profit and other objectives
$$\text{profit} = \text{total revenue} - \text{total cost}$$
- Most firms want maximum profit, but other objectives include:
- survival (a new firm's first aim),
- growth (for economies of scale and market power),
- social objectives (helping people or the environment).
Practice
Total revenue is 12,000 and total cost is 8,000. What is the profit (in dollars)?
Profit = total revenue − total cost = 12,000 − 8,000 = 4,000.
Practice
A new firm's first objective is often:
New firms aim to survive first; profit, growth and other aims come later.
You've got it
Key idea
- total cost = fixed + variable; average cost = total ÷ units; total revenue = price × quantity
- profit = total revenue − total cost
- objectives beyond profit: survival, growth, social aims