Chapter 3 - Profit maximisation

Total Revenue

Money earned by selling goods/services, calculated as price × quantity.

Marginal Revenue

Change in total revenue from producing one additional unit.

Accounting Costs

Direct costs recorded in a firm's accounts, used to calculate accounting profit.

Economic Costs

Includes accounting costs, indirect costs, and opportunity costs (value of the next best alternative).

Variable Costs

Costs that change with production levels (e.g., energy for machines).

Fixed Costs

Costs that remain constant regardless of production levels (e.g., factory rent).

Sunk Costs

Fixed costs that cannot be recovered once incurred.

Total Costs

Sum of variable and fixed costs (TC = VC + FC).

Cost Function

Equation showing how costs depend on output (e.g., C(Q)=A+cQ).

Marginal Cost

Cost of producing one additional unit; derived from changes in variable costs.

Average Total Cost

Cost per unit of production, calculated as total cost divided by quantity (AC(Q)=C(Q)/Q).

Profit

Revenue minus total costs; includes accounting profit and economic profit.

Factors of Production

Inputs like labor (L) and capital (K) used to produce goods/services.

Marginal Product

Output change from adding one more unit of an input (e.g., labor or capital).

Returns to Scale - Increasing

MC decreases as output increases (economies of scale).

Returns to Scale - Decreasing

MC increases as output increases (diseconomies of scale).

Returns to Scale - Constant

MC stays the same as output increases.

Product Differentiation

Strategy to make a product distinct (e.g., unique features or quality).

Network Effects

A product’s value increases as more people use it (e.g., social media platforms).

Market Structures

Classifies industries based on competition levels and behavior.

Perfect Competition

describes market structure
Many firms, identical products, and intense price competition (theoretical model).

Effective Competition

Real-world competition where rivals or consumers limit price-setting power.

Monopolistic Competition

Many firms with differentiated products, giving each some pricing power.

Oligopoly

Few firms dominate the market, with some barriers to entry and product differentiation.

Monopoly

One firm controls the market, often with high barriers to entry.

Market Power

A firm’s ability to set prices above marginal cost due to limited competition.

Lerner Index

Measures price mark-ups over marginal cost, showing market power.

Price Discrimination (PD)

Selling the same product at different prices to different customers.

PD First-Degree

Personal pricing (exact willingness to pay).

PD Second-Degree

Versioning (bulk discounts, feature variations).

PD Third-Degree

Group pricing (e.g., student or senior discounts).