Chapter 22 - Firm's cost, revenue and objectives

Define cost of production

A firm’s expenditure in the process of producing goods and services

What are the 6 types of cost of production?

• Fixed cost 

• Variable cost 

• Total cost 

• Average variable cost 

• Average fixed cost 

• Average total cost

Define fixed cost

Cost that a firm has to pay no matter how much it produces or sell 

Define variable cost

Cost that changes as the level of output changes

Define total cost

The sum of all fixed costs and variable costs or production 

> Total cost = fixed cost + variable cost 

Define average fixed cost 

Refers to a firm’s fixed costs per unit of output 

> AFC = fixed cost / level of output

Define average variable cost

Refers to the variable cost per unit of output 

> AVC = variable cost / output level 

Define average total cost

The total cost per unit of output 

> ATC = (total fixed cost + total variable cost) / output level 

Define revenue

The income firm receives from the sale of goods and services

Define total revenue

The total amount of money received from sale of goods and services 

> Total revenue = price x quantity sold

Define average revenue

The income firm receives from the sale of goods and services per unit 

> Avg revenue = total revenue / quantity sold

What are 3 objectives of firms ?

• Survival 

• Growth 

• Profit maximization

What is the formula to find profit?

Profit = total revenue - total cost