3.7 - firms' costs, revenue and objectives Flashcards
cost of production
total amount of money used in order to produce the good
fixed cost (FC)
costs of production that do not change with output in the short run
- rent, furniture, machinery
variable cost (VC)
costs of production that change with output in the short run
- raw materials, workers
proportional linear line
total cost (TC)
total amount spent by producers on the FOPs used to produce a good or service
average fixed cost (AFC)
the total fixed cost divided by output
- FC is constant, so AFC falls as output increases
- never reaches 0
average variable cost (AVC)
- total variable cost divided by output
- amount of variable cost per unit output
is smiley quadratic
- output increases, VC falls
- it falls until it reaches a minimum point
- rises again due to the law of diminishing marginal returns
- producing too much --> more capital, costs too much
average total cost (ATC)
average total cost of producing one unit of output
- AFC + AVC - quadratic, higher than AVC
total revenue (TR)
total amount received from the selling of goods and services
- TR = PQ (if all things are sold)
- area under demand curve
- average revenue = price
profit, loss and breakeven
profit: total revenue > total cost
loss: total revenue < total cost
breakeven: total revenue = total cost
economies of scale
internal + external EOS
advantages in the form of lower long-run average costs by producing on a larger scale
- internal EOS: advantages gained by firms when they increase in size - external EOS: advantages available to all the firms in the industry resulting from the growth of the industry
increasing return to scale (IRS)
more output –> less cost
- should increase output
constant return to scale (CRS)
change in output –> not much change in cost
- maintain same level of Q
