Economics
Learning Unit 7-10
(Chapters 9 to 12)
,Chapter 9: Background to Supply - Production and
Cost
Types of Firms and the Goal of the Firm
There are a few types of firms: In economics, the goal of the firm is:
Sole proprietorship To MAXIMISE profit
Partnership
Company (public and private)
Co-operatives
Close corporations
Something to note: Cashflow vs Profit
Cashflow is what is inside the bank account, but profit is an accounting concept, the revenue -
cost.
Price makers and Price takers
Price takers: firms with no control over the prices, usually use what is set by the
marketplace (e.g. stocks of a company)
Price makers: firms with control over the prices, set the prices of their own products (e.g. a
brand like Hermes, but most firms fit into this category).
Total, marginal and Average revenue
Total Revenue: Average Revenue: Marginal Revenue:
Relationships between total, average and marginal revenue:
TR ↑ when MR is +
TR ↓ when MR is –
TR remains unchanged when MR = 0
AR ↑ when MR > AR
AR ↓ when MR < AR
AR remains unchanged when MR = AR
, Short run vs Long run
Short Run: a period in which at least one of the inputs (LLCE) is fixed.
Long Run: a period in which all the inputs are variable
Basic cost and profit concepts
Cost
Opportunity costs – best alternative sacrificed or forgone
Explicit costs – monetary payments for F.O.P
Implicit costs – opportunity costs that are not monetary payments
Accounting costs – explicit costs (the costs that are put on the statement of comprehensive
income)
Economic costs – explicit costs + (implicit costs = opportunity costs)
Cost Formulas
Total Cost: Average Cost: Marginal Cost: Average Fixed Cost:
Average Fixed Cost:
Private Costs and Social Costs
Private costs: the producers cost of providing costs and services
Social costs: costs to society
Externalities: External costs (negatives – e.g. pollution due to factories)
Internal costs (positives – e.g. bees give honey and pollenate plants)
Relationships between total, average and marginal cost:
TR ↑ when MR is +
AR ↑ when MR > AR
AR ↓ when MR < AR
AR remains unchanged when MR = AR
Learning Unit 7-10
(Chapters 9 to 12)
,Chapter 9: Background to Supply - Production and
Cost
Types of Firms and the Goal of the Firm
There are a few types of firms: In economics, the goal of the firm is:
Sole proprietorship To MAXIMISE profit
Partnership
Company (public and private)
Co-operatives
Close corporations
Something to note: Cashflow vs Profit
Cashflow is what is inside the bank account, but profit is an accounting concept, the revenue -
cost.
Price makers and Price takers
Price takers: firms with no control over the prices, usually use what is set by the
marketplace (e.g. stocks of a company)
Price makers: firms with control over the prices, set the prices of their own products (e.g. a
brand like Hermes, but most firms fit into this category).
Total, marginal and Average revenue
Total Revenue: Average Revenue: Marginal Revenue:
Relationships between total, average and marginal revenue:
TR ↑ when MR is +
TR ↓ when MR is –
TR remains unchanged when MR = 0
AR ↑ when MR > AR
AR ↓ when MR < AR
AR remains unchanged when MR = AR
, Short run vs Long run
Short Run: a period in which at least one of the inputs (LLCE) is fixed.
Long Run: a period in which all the inputs are variable
Basic cost and profit concepts
Cost
Opportunity costs – best alternative sacrificed or forgone
Explicit costs – monetary payments for F.O.P
Implicit costs – opportunity costs that are not monetary payments
Accounting costs – explicit costs (the costs that are put on the statement of comprehensive
income)
Economic costs – explicit costs + (implicit costs = opportunity costs)
Cost Formulas
Total Cost: Average Cost: Marginal Cost: Average Fixed Cost:
Average Fixed Cost:
Private Costs and Social Costs
Private costs: the producers cost of providing costs and services
Social costs: costs to society
Externalities: External costs (negatives – e.g. pollution due to factories)
Internal costs (positives – e.g. bees give honey and pollenate plants)
Relationships between total, average and marginal cost:
TR ↑ when MR is +
AR ↑ when MR > AR
AR ↓ when MR < AR
AR remains unchanged when MR = AR
