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 are 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+cQC(Q) = A + cQC(Q)=A+cQ, where AAA is fixed cost, cQcQcQ is variable cost).

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)/QAC(Q) = C(Q)/QAC(Q)=C(Q)/Q).

Profit
Revenue minus total costs; includes accounting profit (with accounting costs) and economic profit (with economic costs).

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

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
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).