Firms' Costs, Revenue and Objectives

This section explores the fundamental concepts of costs, revenue, and objectives that underpin firm behaviour in microeconomics. We will focus on calculating different types of costs and understanding how firms make decisions based on these factors.

Key Concepts

Revenue

Revenue is the total amount of money a firm receives from selling its goods or services.

Total Revenue (TR) is the product of the price per unit and the quantity sold.

$$TR = P \times Q$$

Average Revenue (AR) is the total revenue divided by the quantity sold.

$$AR = \frac{TR}{Q} = \frac{P}{Q}$$

Cost

Cost represents the expenditure incurred by a firm in producing goods or services.

Fixed Costs (FC) are costs that do not change with the level of output. Examples include rent, salaries of permanent staff, and insurance.

Variable Costs (VC) are costs that change with the level of output. Examples include raw materials, wages of temporary staff, and energy costs.

Total Cost (TC) is the sum of fixed costs and variable costs.

$$TC = FC + VC$$

Average Variable Cost (AVC) is the variable cost divided by the quantity produced.

$$AVC = \frac{VC}{Q}$$

Average Total Cost (ATC) is the total cost divided by the quantity produced.

$$ATC = \frac{TC}{Q}$$

Profit and Loss

Profit is the difference between total revenue and total cost.

$$Profit = TR - TC$$

Loss occurs when total cost exceeds total revenue.

$$Loss = TC - TR$$

Cost Calculations

Total Cost (TC)

Total cost is calculated by adding fixed costs and variable costs.

Cost Type	Formula
Fixed Costs (FC)	FC
Variable Costs (VC)	VC
Total Cost (TC)	$TC = FC + VC$

Average Total Cost (ATC)

Average total cost reflects the cost per unit of output.

Cost Type	Formula
Total Cost (TC)	$TC$
Quantity (Q)	$Q$
Average Total Cost (ATC)	$ATC = \frac{TC}{Q}$

Average Variable Cost (AVC)

Average variable cost shows the variable cost per unit of output.

Cost Type	Formula
Variable Costs (VC)	$VC$
Quantity (Q)	$Q$
Average Variable Cost (AVC)	$AVC = \frac{VC}{Q}$

Fixed Cost (FC)

Fixed costs remain constant regardless of the level of output.

Cost Type	Formula
Fixed Costs (FC)	FC

Variable Cost (VC)

Variable costs change directly with the level of output.

Cost Type	Formula
Variable Costs (VC)	$VC$

Firm Objectives

Firms have various objectives that guide their decision-making. Common objectives include:

• Maximizing Profit: This is the primary objective for most firms. Firms aim to earn the highest possible profit.
• Maximizing Revenue: Some firms may prioritize maximizing revenue, even if it means incurring losses in the short run.
• Market Share: Firms may focus on increasing their share of the market, even if it doesn't immediately lead to higher profits.
• Growth: Firms may aim to expand their operations and increase their overall size.

The choice of objective often depends on the firm's ownership structure, industry, and long-term strategy.