1. To define & evaluate a range of key cost, revenue & production related concepts 2. To explain the inter- relationship between costs (focusing upon the short –run) 3. To understand the concept of revenue, and the importance of profit maximisation Theory of Production & Costs Lecture Objectives:

Costs of production Revenues Firms’ rational decisions about how much output to supply depend upon….. Firm chooses level of output

 Accounting cost  actual payments for resources in a period  Opportunity cost  amount lost by not using a resource in its best alternative use  Economists include opportunity cost in a firm’s total costs

Average cost: Total Cost output Marginal cost = TC QxQx

TVC TFC Output (Q) TFC (£) 12 TVC (£)

TC TVC TFC Output (Q) TFC (£) 12 TVC (£) TC (£)

 Total Revenue: (P x Q)  Average revenue: Total Revenue output  Marginal revenue = TR Q

7.7 Sales (Q) Average revenue (AR) Total revenue (TR) Marginal revenue (MR)

7.8

QTFCTVCAFCAVCTCACMC

7.10

7.11 Output Q1Q1 E MC, MR MC MR 0 If MR > MC, an increase in output will increase profits. If MR < MC, a decrease in output will increase profits. So profits are maximized when MR = MC at Q 1 (so long as the firm covers average variable costs)