3.7 - Firms’ costs, revenue and objectives
3.7.1-3.7.2 - Costs of production
Production and productivity (not in syllabus, just know)
● Specialisation: Producers should concentrate on producing what they are
best at
● Diversification: If a firm is only specialising in producing one product,
demand could fall, so they should produce a range of different products in
case consumer demand for any of them decreases.
● Chain of productivity activity: Each chain of productivity links together many
different firms, industries and industrial sectors. From firms in the primary
sector producing natural resources (e.g coal), to the secondary sector
producing component parts and finished goods and services from raw
materials, to tertiary sector businesses that operate warehouses, and sell
products to customers
Costs
The cost in production is the total amount of money used in order to produce a
good.
Costs include:
1) Rent
2) Machinery
3) Raw Materials
4) Labour
5) Electricity
6) Transport cost
Fixed cost - FC (short run only)
Fixed cost is the total production cost that does not change with output in the
short run.
E.g rent (cannot get refund), furniture, machinery
● Will continue to be paid once production starts
● Curve is flat because fixed costs do not vary with output
● ONLY TRUE WHEN A FIRM IS OPERATING AT FULL CAPACITY. This is because
when a firm has no more space or
equipment to raise output further
they may have to invest in more
machinery, labour, or expand their
premise in order to expand its scale
of production
, Average fixed cost - AFC
Average fixed cost is the total fixed cost per unit of output.
● Since fixed cost is constant, the average fixed cost will decrease as output
increases
● Because the fixed costs are spread over an increasing number of output
○ E.g The school board paid $10000 fixed cost for a classroom that can
be filled with 30 students, but there are only 10 students in the class. So
you should increase the class size to make the FC more worth it.
○ E.g fixed cost = $50, output was originally 50 units, then it increased to
1000 units. So: 50/50 —> 50/1000 (gets smaller but never reaches zero)
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝐹𝐶
AFC = =
𝑜𝑢𝑡𝑝𝑢𝑡 𝑄
● E.g Netflix - you pay a monthly fee of HKD93 and you watch 100 movies a
month. Your average fixed cost would be:
93
AFC =
100
= 𝐻𝐾𝐷 0. 93 p/ movie
● The curve will never reach zero cost
Variable cost - VC (short and run long run)
Variable cost is the cost of production that changes with output.
E.g if you are producing apple pie you need to pay more for apples
E.g wages, raw materials, commission, component parts
E.g more electricity will have to paid for in order for machinery to run
E.g pay workers overtime, employ more workers
3.7.1-3.7.2 - Costs of production
Production and productivity (not in syllabus, just know)
● Specialisation: Producers should concentrate on producing what they are
best at
● Diversification: If a firm is only specialising in producing one product,
demand could fall, so they should produce a range of different products in
case consumer demand for any of them decreases.
● Chain of productivity activity: Each chain of productivity links together many
different firms, industries and industrial sectors. From firms in the primary
sector producing natural resources (e.g coal), to the secondary sector
producing component parts and finished goods and services from raw
materials, to tertiary sector businesses that operate warehouses, and sell
products to customers
Costs
The cost in production is the total amount of money used in order to produce a
good.
Costs include:
1) Rent
2) Machinery
3) Raw Materials
4) Labour
5) Electricity
6) Transport cost
Fixed cost - FC (short run only)
Fixed cost is the total production cost that does not change with output in the
short run.
E.g rent (cannot get refund), furniture, machinery
● Will continue to be paid once production starts
● Curve is flat because fixed costs do not vary with output
● ONLY TRUE WHEN A FIRM IS OPERATING AT FULL CAPACITY. This is because
when a firm has no more space or
equipment to raise output further
they may have to invest in more
machinery, labour, or expand their
premise in order to expand its scale
of production
, Average fixed cost - AFC
Average fixed cost is the total fixed cost per unit of output.
● Since fixed cost is constant, the average fixed cost will decrease as output
increases
● Because the fixed costs are spread over an increasing number of output
○ E.g The school board paid $10000 fixed cost for a classroom that can
be filled with 30 students, but there are only 10 students in the class. So
you should increase the class size to make the FC more worth it.
○ E.g fixed cost = $50, output was originally 50 units, then it increased to
1000 units. So: 50/50 —> 50/1000 (gets smaller but never reaches zero)
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝐹𝐶
AFC = =
𝑜𝑢𝑡𝑝𝑢𝑡 𝑄
● E.g Netflix - you pay a monthly fee of HKD93 and you watch 100 movies a
month. Your average fixed cost would be:
93
AFC =
100
= 𝐻𝐾𝐷 0. 93 p/ movie
● The curve will never reach zero cost
Variable cost - VC (short and run long run)
Variable cost is the cost of production that changes with output.
E.g if you are producing apple pie you need to pay more for apples
E.g wages, raw materials, commission, component parts
E.g more electricity will have to paid for in order for machinery to run
E.g pay workers overtime, employ more workers
