Business Costs, Revenues, And profit

What is the purpose of firms, and which factors of production do they use?

Firms produce goods and services, often aiming for profit.

They combine land, labour, capital, and enterprise

What are fixed costs? Give examples

Costs that do not change with output (rent, insurance, loan repayments)

What are variable costs? Give examples

Costs that change with output (raw materials, packaging, production wages)

How are total cost (TC) and average cost (AC) calculated?

TC = Fixed costs + variable costs

AC = Total cost / quantity produced

What is marginal cost (MC)?

The additional cost of producing one more unit of output

Why is controlling business costs important?

It helps firms set prices and output levels, improve profitability, and remain competitive

What is revenue, and how is total revenue (TR) calculated?

Revenue is income from sales

TR = Price x Quantity sold

How are average revenue (AR) and marginal revenue (MR) defined?

AR = Total revenue / quantity sold (usually price)

MR = Extra revenue from selling one more unit

How does price elasticity of demand affect total revenue?

Inelastic demand - raising prices increases revenue

Elastic demand - raising prices reduces revenue

How is profit calculated, and when does a firm make a loss?

Profit = total revenue - total cost

A loss occurs when total costs exceed total revenue

What is the difference between normal and supernormal profit?

Normal: Minimum return to keep operating, covering opportunity costs

Supernormal: Profit above this level

Why is profit important to businesses?

It rewards risk-taking, funds reinvestment, growth, and innovation

Persistent losses may cause closure

What is break-even point, and why is it useful?

Where total revenue equals total cost (no profit or loss)

It shows the sales needed to cover costs

What is productivity, and how does it affect business costs?

Output per worker or input

Higher productivity can reduce average costs and increase profit margins

What is efficiency in producion?

Using available resources to produce maximum output at the lowest possible cost