Economics chapter 19 onwards

• Total Revenue (TR) is the total amount received from selling goods or services over a given period of time.
• Fixed cost


  Cost that doesn't change with output
• Variable cost


  Cost which vary proportionately with output
• Total cost


  The sum of all fixed and variable cost of production
• Fixed Costs


  Costs which do not change with output
• Fixed costs


  • Costs of production that have to be paid regardless of the amount a business produces or sells
  • For example, salaries for senior managers, loan repayments and rent
• Variable Costs


  Costs which vary proportionately with output
• Total costs


  The total cost of production
• Total Fixed Costs


  The fixed costs of production
• Output


  The quantity of goods or services produced
• The total cost line starts at the same value as fixed costs because even when nothing is produced, fixed costs still have to be paid by the firm
• Average fixed cost (AFC)


  The fixed cost per unit of output
• As a firm produces more output, its fixed costs are divided by a greater quantity (of output), so AFC continually declines
• Average fixed cost formula

  Fixed cost / output level
• Average variable cost (AVC)


  The variable cost of production per unit of output
• The shape of the AVC curve is similar to that shown above, where economies of scale allow the firm to enjoy falling AVC. The onset of diseconomies of scale will increase a firm's AVC as it overproduces
• Average variable cost formula

  Variable cost / output level
• Average total cost (ATC)


  The total cost of making one product, the unit cost of production
• Average total cost formula

  Total cost / output level
• 1. shaped average costs curve

  Firms that operate on a large scale are able to reduce their average cost of production because they benefit from economies of scale. However, if the firm becomes too large, it will suffer from inefficiencies, thus leading to diseconomies of scale.
• Revenue


  The money payable to a business from the sale of its products
• Revenue example

  • McDonald's, the world's largest restaurant chain with over 37,000 restaurants worldwide, earns around $ 25 billion of revenue a year from the sale of fast food.
• Total revenue


  The aggregate amount of money a firm receives from selling goods and services. Total revenue = price x quantity sold
• Average revenue


  The typical price received from the sale of a good or service. Average revenue = Total Revenue / Output
• Break Even Point

  The point where the total costs and total revenues of a business are equal (i.e. the firm makes neither a profit nor a loss)
• Drawing a break-even chart

  1. Need information about fixed costs, variable costs and revenue

  2. Complete a table with variable costs and revenue when no output is being produced
• Profit maximisation

  The main goal of most private sector firms. Profit is maximised when the positive difference between a firm's sales revenue and its cost of production is at its greatest. Firms can maximise profit by increasing prices or reducing costs.
• Objectives of firms

  • Survival
  • Social welfare
  • Growth
  • Profit maximisation
• Profit provides an incentive for entrepreneurs to take risks. Without profit, firms will struggle to survive in the long run.
• Case study: US airline industry

  • American Airlines and US Airways merged to create the world's largest airline in a deal worth $11 billion
  • American Airlines offers around 6700 daily flights to nearly 350 destinations and has annual revenue of around $40 billion