Lecture notes 4.1.4 Business objectives and pricing decisions

4.1.4 Business objectives and pricing decisions



 Total costs are how much it costs to produce a given level of output.
 TC = FC + VC
 Fixed costs do not change with output (indirect costs)
o Rent
o Utilities
o Advertising
o Capital goods
 Variable costs change with production (direct costs)
o Cost of raw materials
o Wages
o Delivery costs
 Average cost is cost per unit of output
o ATC = AVC + AFC
o AFC = TFC / Q
o AVC = TVC / Q
 Marginal cost is how much It costs to produce one extra unit of output
o MC = change in TC / change in Q
 Short run average cost (SRAC) measures of short run vary with industry
o SRAC = SRTC / Q
 Marginal productivity
o Adding more units of variable input to fixed input increases output at first
o However, if a certain number of inputs are added the marginal increase of output
becomes constant.
o Can occur due to factors such as labour becoming less efficient, productive.
 Break even






o A firm break even when TR = TC
 Profit maximisation