Ch 10 - Rational Producer Behaviour
Rational producer behaviour: in an economy, firms are assumed to be having in a rational way, by always trying to maximise the profits they make.
Classification of costs:
Economic cost: this is the total sacrifices made in order to bring a good or service into existence. These costs can be categorised into:
Implicit costs: this is forgone alternative which a firm would have undertaken if it had taken note of it
Explicitly costs: monetary costs that a firm pay to outside suppliers of inputs
Total costs:
- Total fixed cost (TFC): costs that a firm incurs that do not change with output in a given time period
- Total variable cost (TVC): costs that a firm faces which vary with change in output within a given time period
- Total cost (TC): cost of all fixed and variable factors to produce an output TC = TVC + TFC
Average costs: costs a firm incurs to produce every unit of output
- Average fixed cost (AFC): fixed cost per unit output AFC = TFC/q
- Average variable cost (AVC): variable cost per unit output AVC = TVC/q
- Average cost (AC): unit per cost per unit output, sum of average fixed cost and average variable cost ATC = TC/q
Marginal Cost: additional cost incurred for producing one more unit of an output
- MC = △TC / △q
Revenue: income a firm received for selling its output. Revenues can be average, total, or marginal revenue
- Total revenue (TR): total amount of money that a firm receives from selling its produced output in a given period of time
- Average revenue (AR): revenue a firm receives for selling every unit of its output
- Marginal revenue (MR): extra income earned by a firm for selling its good or service in a specified period of time
Measuring profit:
- → Total profit = total revenue - economic cost
Forms of profit:
- Normal profit: when total revenue is equal to total cost
- Abnormal profit: when total revenue is more than total cost
- Negative profit (losses): when total revenue is less than total cost
Objectives of the firm in this economy:
- Market share growth when a firm aims to increase the number of customers buying its product
- Revenue maximising: when the firm aims to increase its revenue through sales