4.1.4 Business objectives and pricing decisions

What are total costs

Cost of producing given output

How are total costs calculated

TFC plus TVC

What are total fixed costs

Costs that do not change with output

Give examples of fixed costs

Rent advertising capital

Why are fixed costs indirect

They do not depend on output

What are total variable costs

Costs that change with output

Give examples of variable costs

Raw materials labour

Why are variable costs direct

They depend on output

What is average total cost

Cost per unit of output

How is ATC calculated

TC divided by quantity

What is the relationship between ATC AVC AFC

ATC equals AVC plus AFC

What is average fixed cost

Fixed cost per unit

What happens to AFC as output rises

It falls

What is average variable cost

Variable cost per unit

What is marginal cost

Cost of one extra unit

How is marginal cost calculated

Change in TC divided by change in output

What is the short run

At least one factor is fixed

What is the long run

All factors are variable

What does diminishing marginal productivity mean

Extra inputs raise output less

Why does diminishing returns occur

Workers become less efficient

What happens to costs after diminishing returns

Costs rise

How do MC AVC ATC behave after diminishing returns

They rise

What happens to AFC as output increases

It falls

Where does MC cut ATC and AVC

At their minimum points

What is total revenue

Price times quantity

What is average revenue

Revenue per unit

What is marginal revenue

Revenue from one extra unit

What is profit

TR minus TC

When does a firm break even

TR equals TC

Where is profit maximised

MC equals MR

When do profits rise

MR greater than MC

When do profits fall

MC greater than MR

What is normal profit

Minimum needed to stay in business

Why is normal profit a cost

It covers opportunity cost

What is supernormal profit

Profit above normal profit

When does supernormal profit occur

TR greater than TC

What is sales maximisation

Maximising output without loss

Where does sales maximisation occur

AR equals AC

What is satisficing

Enough profit to satisfy shareholders

Why do managers satisfice

Separation of ownership and control

What is survival as an objective

Staying in the market

When is survival most important

During recessions

Why do firms aim for market share

Improves long run survival

What is cost efficiency

Producing at lowest average cost

Why is cost efficiency important

Improves competitiveness

What is return on investment

Profit from investment

Why is ROI important

Helps investment decisions

Why do firms care about employee welfare

Higher productivity and loyalty

What is customer satisfaction as an objective

Improving quality and service

What are social objectives

Maximising social welfare