Revenue cost profit

• Shareholders will seek to maximise their utility by maximising profits – profit maximisation occurs when marginal revenue (MC) is equal to marginal costs (MR) – so Profit max is where MC = MR. However, some firms may find they are making a loss at this position.

  
• Managers will also want to maximise their utility, which is often linked to the amount of sales they achieve. So, they will want to operate at a sales maximising position (maximum number of sales possible while still breaking even)- this point is where Average Revenue (AR) is equal to Average Costs (AC) – so Sales max is where AR = AC.

  
• Revenue maximisation is where the business makes their absolute maximum revenue, and occurs where Marginal Revenue = 0. (where the MR curve crosses the bottom of the diagram)

  
• ·     Total revenue = Price x Quantity
• ·     Average Revenue = total revenue  ÷ quantity
• ·     Marginal revenue = change in revenue  ÷ change in quantity
• ·     Total costs = total fixed costs x total variable costs

  ·     Total variable costs = variable cost x quantity

  ·     Average (total) cost = total cost  ÷ quantity

  ·     Average fixed cost = total fixed cost  ÷ quantity

  ·     Average variable cost = total variable cost  ÷ quantity

  ·     Marginal cost = change in cost  ÷ change in quantity
• Increases in output are limited by Diminishing returns. This is because in the short run, atleast one factor of production if fixed. When you increase one factor of production by one unit but keep the others fixed, the extra output you get is called the marginal product (aka marginal returns)

  
• Initially as you add more of a factor of production, the marginal product will increase. This is because each unit of input added will add more ouput than the one before (because of specialisation and division of labour). Eventually, if you keep adding units, the fixed factor of production will begin to limit the additional output. (For example, if there is only 1 large machine with 3 buttons, the 4th worker added will provide less output than the previous 3 workers because there is no space or capital for him).