Background to Theory of the Firm

T3 CC1 (keywords)

Total Product (TP)

(APxQ) Total output (units) produced with given inputs

Average Product (AP)

(TP/Q) The average output (units) produced per unit of input

Marginal Product (MP)

(∆TP/∆Q) The additional output produced with extra unit of inputs

Total Cost (TC)

(TFC + TVC) Total costs a firm must pay

Average Cost (AC)

(TC/Q) Cost per unit

Marginal Cost (MC)

(∆TC/∆Q) Cost of making one more unit

Total Fixed Cost (TFC)

(TC-TVC) Costs incurred when output is zero. They do not change with output

Total Variable Cost (TVC)

(TC-TFC) Costs are zero when output is zero. They do change with output

Average Fixed Cost (AFC)

(TFC/Q or AC-AVC) Fixed costs per unit

Average Variable Cost (AVC)

(TVC/Q or AC-AFC) Variable costs per unit

Total Revenue (TR)

(P x Q) Total amount of money a firm receives, turnover, sales revenue

Average Revenue (AR)

((PxQ)/Q or P or D) Amount of money received per unit sold

Marginal Revenue (MR)

(∆TR/∆Q) Amount of money received per extra unit sold.

Total profit

(TR-TC) Supernormal, abnormal or subnormal (a loss)

Normal profit

(AR=AC) Return to the entrepreneur is built into costs - just enough profit to keep the entrepreneur in this function

Supernormal (abnormal) profit

(AR>AC) Profit earned over and above normal profit

Profit maximisation

(MC=MR) Marginal profit is zero

Subnormal profit/Loss

(AR<AC) Where firm earns less than normal profit

Sales maximisation

(AC=AR or TR=TC) Highest level of output consistent with normal profit

Revenue maximisation

(MR=0) Maximum total revenue

Price taker/perfectly elastic demand

(AR=MR) TR straight line going through zero, AR and MR horizontal

Price maker/monopoly

(AR>MR) AR downward sloping, MR twice gradient

Break even or normal profit

(AR=AC) Firm covers costs and makes only normal profit.