22. Firms, Costs, Revenue and Objectives

1. Production Time Frames

1.1 Short Run

• A period during which at least one factor of production (e.g., capital) is fixed.

• Firms cannot freely adjust all resources.

1.2 Long Run

• A period where all factors of production can be changed.

• Firms can fully adjust their production capacity.

2. Product Definitions

2.1 Total Product (TP)

• The total output produced by a firm using all inputs.

2.2 Average Product (AP)

• Output per unit of input:
  AP = Total Product ÷ Units of Input

3. Short Run Costs

3.1 Fixed Costs (FC)

• Do not vary with output.

• Examples include:

• Rent

• Salaries of administrative staff

• Depreciation on buildings and equipment

3.2 Variable Costs (VC)

• Change directly with the level of output.

• Examples include:

• Raw materials

• Direct labor costs

• Fuel and routine maintenance

3.3 Total Costs (TC)

• Formula: TC = FC + VC

4. Average Costs

4.1 Average Fixed Cost (AFC)

• Formula: AFC = TFC ÷ Quantity of Output

• Decreases as output increases.

4.2 Average Variable Cost (AVC)

• Formula: AVC = TVC ÷ Quantity of Output

4.3 Average Total Cost (ATC)

• Formula: ATC = TC ÷ Quantity = AFC + AVC

• Represents cost per unit of output.

• Typically U-shaped due to the law of diminishing returns.

5. Revenue Concepts

5.1 Total Revenue (TR)

• Formula: TR = Price × Quantity

• The total income a firm receives from sales.

5.2 Average Revenue (AR)

• Formula: AR = TR ÷ Quantity

• In perfect competition, AR equals the price of the product.

6. Revenue in Different Market Structures

6.1 Perfect Competition

• Many firms, each a price taker.

• Revenue increases proportionally with sales.

6.2 Monopoly

• One firm dominates the market.

• Has control over prices.

• Revenue initially increases but later declines due to the law of demand.

7. Business Objectives

7.1 Profit Maximization

• The classical goal of firms.

• Formula: Profit = Total Revenue – Total Costs

• Maximized where the difference between TR and TC is the greatest.

7.2 Profit Satisficing

• Earning enough profit to remain in business.

• Common in small or lifestyle businesses where maximum profit is not the main goal.

7.3 Sales Maximization

• Aiming to increase market share, possibly at the expense of short-term profits.

• Benefits may include:

• Greater prestige

• Managerial incentives

• Increased long-term pricing power

• Elimination of competitors via predatory pricing

7.4 Growth Maximization

• Focused on expanding firm size, possibly through mergers or acquisitions.

• May involve accepting lower profits in the short term.

• Risks:

• Cash flow issues

• Lower shareholder returns

• Diseconomies of scale

• Loss of focus

7.5 Market Share Maximization

• Aimed at increasing the firm’s share of total sales in the market.

• Important for brand leadership.

• Can be impacted even if sales increase, depending on overall industry growth.

7.6 Survival

• Especially relevant for new firms or during economic downturns.

• Focused on staying operational and maintaining minimum profitability.

7.7 Maximizing Shareholder Value

• Applies to limited and public companies.

• Objective is to increase dividends, share prices, and overall investor satisfaction.

7.8 Corporate Social Responsibility (CSR)

• Voluntary business practices that aim to operate sustainably and ethically.

• Examples include environmentally friendly production or promoting public health.

8. Key Formulas Summary

• Total Cost (TC) = Fixed Cost + Variable Cost

• Average Fixed Cost (AFC) = TFC ÷ Q

• Average Variable Cost (AVC) = TVC ÷ Q

• Average Total Cost (ATC) = AFC + AVC

• Total Revenue (TR) = Price × Quantity

• Average Revenue (AR) = TR ÷ Q

• Profit = TR – TC