Chap16

• Costs


  Expenses incurred by firms when producing goods/services (while setting up and running a business)
• Costs


  • Can be classified according to how they behave when output changes
• Fixed costs (FC)


  Costs that do not vary with the level of output such as rent, business rates, advertising, insurance, interest and corporation tax payments, research and development, labour (if fixed salary agreement)

  
• Fixed costs


  • Frampton Training provides training courses and incurs total fixed costs of $40,000 per year

  
• Variable costs (VC)


  Costs that change when output levels change – the more output the higher the variable cost will be such as raw materials, packaging, labour if piece rate payment
• If no production incurs, VC is zero
• Total variable cost (TVC)


  TVC = VC * Q

  
• Variable costs


  • Frampton Training has VC of $500 per course and provides 100 courses, so TVC = 500*100 = $50,000

  
• Total cost


  Total cost = TFC + TVC

  
• Total cost


  • For 100 training courses, total cost = $40,000 (TFC) + $50,000 (TVC) = $90,000

  
• Average cost


  The cost of producing a single unit of output = Total cost / Quantity
• Average cost


  • For 100 training courses, average cost = $90,000/100 = $900 per training
• Average cost curve


  • U-shaped, average costs fall at first due to economies of scale until they reach a minimum level and then start to rise due to diseconomies of scale
• Total revenue


  The amount of money a firm receives from selling its products = Price * Quantity
• Profit


  Profit = Total Revenue - Total Costs
• If TC > TR

  Loss
• If TC < TR

  Profit