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

  1. 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

  2. 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

  3. 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

     1. Total revenue (TR): total amount of money that a firm receives from selling its produced output in a given period of time   2. Average revenue (AR): revenue a firm receives for selling every unit of its output   3. 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:

     1. Normal profit: when total revenue is equal to total cost   2. Abnormal profit: when total revenue is more than total cost   3. Negative profit (losses): when total revenue is less than total cost

  • Objectives of the firm in this economy:

     1. Market share growth when a firm aims to increase the number of customers buying its product   2. Revenue maximising: when the firm aims to increase its revenue through sales