1)Profit Maximization 2)Sales Revenue Maximization 3)Growth (Large Market Share) 4)Improving the environment 5)Social Responsibility 5 Goals of Firms

Profit = Total Revenue (TR) – Total Cost (TC) Firms usually have the objective of “Profit Maximization” Firms will produce at a point where the difference between TR and TC is maximum 1) Profit Maximization

2) Sales Revenue Maximization Firms try to generate as much revenue as possible 3) Growth (Large Market Share) Firms may want to become the largest in the market for a greater market share

4) Improving the environment Firms may aim to have an environmental friendly process of production 5) Social Responsibility Firms may aim to do some charity or do some work for social benefit

OutputTotal RevenueTotal CostTotal Profit The profit is maximized at the output of 40 units Profit Maximization

Output per week Total Cost $Total Revenue $ A1,00010,00013,000 B2,00016,00030,000 C3,00018,00042,000 D4,00028,00054,000 Check your Understanding 1.At what level of output is average cost at a minimum? 2.At which level of output is average revenue at a maximum? 3.At what level is profit maximized?

Output per week Total Cost $ Total Revenue $ AC = TC/Q AR = TR/Q Profit = TR- TC A1,00010,00013, ,000 B2,00016,00030, ,000 C3,00018,00042, ,000 D4,00028,00054,000Check your Underst anding ,000 Check your Understanding 1.At what level of output is average cost at a minimum? C 2.At which level of output is average revenue at a maximum? B,C 3.At what level is profit maximized? C

Total Output of Plastic Boxes Total Cost ($) , , , , ,300 Check your Understanding The average cost of producing 200 boxes is: The total fixed cost is: The variable cost of producing each box is: If the company produces 500 boxes and wants to make a $1,400 profit from their sale, the price of each box must be

Total Output of Plastic Boxes Total Cost ($) , , , , ,300 Check your Understanding The average cost of producing 200 boxes is: The total fixed cost is: The variable cost of producing each box is: If the company produces 500 boxes and wants to make a $1,400 profit from their sale, the price of each box must be $1,400 + $3,600 = $5,000. $X * 500 = $5,000. X = $10 AC = TC/Q = $1,500/ 200 = $7.5 $100 VC = TC – FC / Q VC = ($4,300- $100) / 600 = $7 VC = ($800 - $100) / 100 = $7

P Q 1000 D S Firm $15 10 Total Revenue Total Revenue TR = Price * Quantity = 15,000 If there was an increase in Price, total revenue would: A.Decrease B.Stay the Same C.Increase D.Cause the firm to fail

P Q 1000 D S Firm $15 11 Total Revenue Total Revenue TR = Price * Quantity = 15,000 If there was an increase in Price, total revenue would: A.Decrease B.Stay the Same C.Increase D.Cause the firm to fail

Total Costs = Total Revenue Or Total Costs – Total Revenue = $0 Break Even 收支平衡 RevenueCosts

Revenue

Break-Even level of output = Total Fixed Costs (Price per unit – Variable Costs per unit) Practice: TFC = $200 Price per unit = $10 Variable Costs per unit = $8 How many units do you need to produce to break even? Break-Even Practice

Practice: TFC = $200 Price per unit = $10 Variable Costs per unit = $8 How many units do you need to produce to break even? Break-Even Practice $200/($10-$8) = $200/2 = 100 units

The short run is a period of time the firm has a fixed scale (fixed factor) of production Short-Run 短期 Versus Long-Run 龙润 Decisions

The long run is a period of time for which there are no fixed factors of production. Firms can ↑ or ↓ scale of operation 經營規模, and firms can enter and exit the industry. Short-Run Versus Long-Run Decisions

Economies of Scale Internal Economies of Scale External Economies of Scale Diseconomies of Scale Internal Diseconomies of Scale External Diseconomies of Scale

Economies of Scale The advantages of large scale production that result in lower unit (average) costs (cost per unit) Economies of scale – spreads total costs over a greater range of output AC = TC / Q What Happens to AC as Q gets bigger?

LRAC = Long Run Average Cost Increasing output decreases AC Economies of Scale. (LRAC ↓ ) Advantages of Being a Large Firm Increasing output increases the AC Diseconomies of Scale. (LRAC ↑) Disadvantages of Being a Large Firm Economies & Diseconomies of Scale

Long Run Average Costs LRAC

What are Economies of Scale ? Increasing returns to scale happen when the cost per unit falls as output increases. Decreasing returns to scale happen when the cost per unit increases as output increases. Constant returns to scale happen when the cost per unit stays the same as output increases.

Review

Economies of scale = costs decreasing as output Increases Diseconomies of Scale = costs increasing as output increases

Review A firm expands its scale of production by investing in an additional factory and machinery. What will most likely happen? A. Variable costs will decrease B. Fixed costs will increase C. Total costs will be unchanged D. Average Costs will increase

Review A firm expands its scale of production by investing in additional factory space and machinery. What will most likely happen? A. Total costs will be unchanged B. Fixed costs will increase C. Variable costs will decrease D. Average Costs will increase

Review A firm that doubles all its inputs of factors of production and more than doubles its output as a result has: A. Constant returns to scale B. Rising profits C. Decreasing returns to scale D. Increasing returns to scale

Review A firm that doubles all its inputs of factors of production and more than doubles its output as a result has: A. Constant returns to scale B. Rising profits C. Decreasing returns to scale D. Increasing returns to scale

Review What is Scale of Production?

Review What are Economies of Scale? Where on the graph would it be?

Economies of scale = costs decreasing as output Increases Diseconomies of Scale = costs increasing as output increases