7.4

• Firm’s Supply Decision:

  • Firms produce goods and services to sell in markets. They must decide how much to produce to maximize their profits.
• • a firm making spoons has two main factors to consider:

  1. Cost of production: This includes wages, machinery, and other inputs. Different production methods may use more labor or more machines.
  2. Demand for the product: The firm must also consider how much people are willing to pay for the spoons, which is reflected in the demand curve.
• Profit Maximization:

  • The firm chooses the level of output (number of spoons produced) that maximizes its profit. This decision depends on balancing total cost and total revenue.
• Cost minimization is key: A firm should aim to produce at the lowest cost possible to increase profits.
• • Total cost: The cost of production, including both fixed and variable costs.
  • Total revenue: The amount of money the firm earns from selling the goods.
  • Profit: Total revenue minus total cost.
• Total cost: The cost of production, including both fixed and variable costs.
• Total revenue: The amount of money the firm earns from selling the goods.
• Total revenue: The amount of money the firm earns from selling the goods.
• Cost Minimization:

  • Definition: The process of producing the desired level of output at the lowest possible cost.
• Cost Minimization:

  • Objective: A firm aims to use the most efficient combination of inputs (labor, capital, raw materials) to minimize production costs.
• Key Point: Cost minimization is crucial because lower costs directly increase profit margins. If a firm can produce the same number of goods using fewer resources, its profitability increases without needing to raise prices or output.
• Total Cost (TC):

  • Definition: The total expense incurred by a firm to produce a certain amount of goods. It includes both fixed and variable costs.
• • Fixed Costs: Costs that do not change regardless of how much is produced (e.g., rent, salaries, equipment).
• 1. Variable Costs: Costs that vary with the level of output (e.g., raw materials, wages based on hours worked).
• total costs (TC)= fixed costs + variable costs
• • As output increases, total cost increases due to the rise in variable costs. At higher production levels, costs may rise sharply (e.g., paying workers overtime).
• total revenue: The total money earned from selling goods or services. It depends on both the price at which goods are sold and the quantity sold
• total revenue (TR) = Price per unit x Quantity Sold
• Demand Curve: The firm must understand the demand curve, which shows how the price customers are willing to pay changes with the quantity sold. Selling more units often means lowering the price.
• • total revenue may increase with more sales, but this doesn’t always mean profit increases, especially if costs rise too quickly.
• profit: The difference between total revenue and total cost. It shows how much money the firm is making after covering all expenses.
• profit = total revenue (TR) - Total Cost (TC)
• A firm aims to produce at the level where profit is maximized, not just revenue. Profit maximization occurs when the difference between revenue and cost is greatest.
• Maximizing profit is different from maximizing revenue. A firm could generate more revenue by selling more goods, but if the cost of producing those extra goods is higher than the additional revenue, profits will decrease.
• What is the first step in calculating a firm's highest profit?

  Determine the output levels.
• Why is it important to identify various levels of output for a firm?

  To understand the different production possibilities and their impact on profit.
• How do you calculate total revenue (TR) for each output level?

  Multiply the quantity of goods produced by the price at which each unit is sold.
• What does total cost (TC) include when calculating for each output level?

  Both fixed and variable costs.
• How is profit calculated for each output level?

  Subtract the total cost from the total revenue.
• What should you do after calculating profit for each output level?

  Compare the profits to identify where the profit is highest.
• What does selecting the output level with the highest profit involve?

  Identifying the level where the gap between total revenue and total cost is largest.
• How can you confirm that you have identified the optimal output level?

  By ensuring that producing more or fewer units results in lower profit or losses.