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What is a fixed cost?
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What is a fixed cost?
Fixed costs are costs that do not change as the level of output changes.
Define the term variable cost.
Variable costs are costs that vary directly with output.
State the meaning of total cost.
The total cost is the sum of the fixed costs and the total variable costs.
What is the formula for calculating the total cost (TC)?
Formula.
Total cost (TC) = Total fixed costs (TFC) + Total variable costs (TVC)
How is the total variable cost (TVC) calculated?
Formula.
Total variable cost (TVC) = Variable cost (VC) × Quantity (Q)
Define the term average total cost (AC).
The average total cost is the total cost divided by the quantity of output. It is the cost per unit.
State the formula used to calculate the average fixed cost (AFC).
Formula.
Average fixed cost (AFC) = Total fixed costs (TFC) ÷ Quantity (Q)
Define the term total revenue.
Total revenue is the total value of all the sales a firm makes.
How is average revenue (AR) calculated?
Formula.
Average revenue (AR) = Total revenue (TR) ÷ Quantity sold (Q)
True or False?
Average revenue is a useful metric for firms selling multiple products at different prices.
True.
Average revenue is especially useful for firms selling multiple products at different prices, or firms that sell the same item at different prices.
What are the objectives of firms?
The objectives of firms are reasons for their existence or the desired focus of their owners.
Define the term profit maximisation.
Profit maximisation is the objective focused on gaining the largest difference between the total revenue (TR) and the total costs (TC).
How can firms increase their profits?
To increase profits, firms can either increase their sales revenue or decrease their costs - or both.
What is a growth objective?
A growth objective occurs when a firm focuses on increasing its sales revenue or market share.
True or False?
A survival objective is when a firm focuses on maximising profit so as to grow.
False.
A survival objective is when a firm, often in the short term, focuses solely on business survival.
What does it mean to have a social welfare objective?
A social welfare objective is when a firm focuses on addressing issues like climate action, poverty, or inequality, while still making a profit to survive.
True or False?
Firms' objectives can change over time.
True.
The objectives of firms can change over time based on market conditions or changing priorities; e.g the objective may change from survival. to profit maximisation.
How is market share measured?
Market share is measured by taking the firm's sales revenue as a percentage of the total sales revenue in that industry.
True or False?
Diseconomies of scale are cost advantages that a firm experiences as it grows larger.
False.
Economies of scale are cost advantages that a firm experiences as it grows larger.
How do firms benefit from growth?
A growing firm is less likely to fail and can benefit from economies of scale.