Business objectives & Revenue, Costs and Profits
Business Objectives
Shareholders will seek to maximise their utility by maximising profits
– profit maximisation occurs when marginal revenue (MC) is equal
to marginal costs (MR) – so Profit max is where MC = MR. However,
some firms may find they are making a loss at this position.
Managers will also want to maximise their utility, which is often
linked to the amount of sales they achieve. So, they will want to
operate at a sales maximising position (maximum number of sales
possible while still breaking even)- this point is where Average
Revenue (AR) is equal to Average Costs (AC) – so Sales max is where
AR = AC.
Revenue maximisation is where the business makes their absolute
maximum revenue, and occurs where Marginal Revenue = 0. (where
the MR curve crosses the bottom of the diagram)
Revenue, Costs & Profits
Revenue
Total revenue = Price x Quantity
Average Revenue = total revenue ÷ quantity
Marginal revenue = change in revenue ÷ change in quantity
When demand is elastic, increasing price will reduce total revenue and decreasing price will increase total revenue
When demand is inelastic, increasing price will increase total revenue and decreasing price will reduce total revenue
Costs
Total costs = total fixed costs x total variable costs
Total variable costs = variable cost x quantity
Average (total) cost = total cost ÷ quantity
Average fixed cost = total fixed cost ÷ quantity
Average variable cost = total variable cost ÷ quantity
Marginal cost = change in cost ÷ change in quantity
Diminishing Marginal Returns
Increases in output are limited by Diminishing returns. This is because in the short run, atleast one factor of
production if fixed. When you increase one factor of
production by one unit but keep the others fixed, the
extra output you get is called the marginal product (aka
marginal returns)
Initially as you add more of a factor of production, the
marginal product will increase. This is because each unit
of input added will add more ouput than the one before
(because of specialisation and division of labour).
Eventually, if you keep adding units, the fixed factor of
production will begin to limit the additional output. (For
example, if there is only 1 large machine with 3 buttons,
the 4th worker added will provide less output than the
previous 3 workers because there is no space or capital
for him).
Business Objectives
Shareholders will seek to maximise their utility by maximising profits
– profit maximisation occurs when marginal revenue (MC) is equal
to marginal costs (MR) – so Profit max is where MC = MR. However,
some firms may find they are making a loss at this position.
Managers will also want to maximise their utility, which is often
linked to the amount of sales they achieve. So, they will want to
operate at a sales maximising position (maximum number of sales
possible while still breaking even)- this point is where Average
Revenue (AR) is equal to Average Costs (AC) – so Sales max is where
AR = AC.
Revenue maximisation is where the business makes their absolute
maximum revenue, and occurs where Marginal Revenue = 0. (where
the MR curve crosses the bottom of the diagram)
Revenue, Costs & Profits
Revenue
Total revenue = Price x Quantity
Average Revenue = total revenue ÷ quantity
Marginal revenue = change in revenue ÷ change in quantity
When demand is elastic, increasing price will reduce total revenue and decreasing price will increase total revenue
When demand is inelastic, increasing price will increase total revenue and decreasing price will reduce total revenue
Costs
Total costs = total fixed costs x total variable costs
Total variable costs = variable cost x quantity
Average (total) cost = total cost ÷ quantity
Average fixed cost = total fixed cost ÷ quantity
Average variable cost = total variable cost ÷ quantity
Marginal cost = change in cost ÷ change in quantity
Diminishing Marginal Returns
Increases in output are limited by Diminishing returns. This is because in the short run, atleast one factor of
production if fixed. When you increase one factor of
production by one unit but keep the others fixed, the
extra output you get is called the marginal product (aka
marginal returns)
Initially as you add more of a factor of production, the
marginal product will increase. This is because each unit
of input added will add more ouput than the one before
(because of specialisation and division of labour).
Eventually, if you keep adding units, the fixed factor of
production will begin to limit the additional output. (For
example, if there is only 1 large machine with 3 buttons,
the 4th worker added will provide less output than the
previous 3 workers because there is no space or capital
for him).
