1. 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:

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

3.  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

4. Average cost: Total Cost output Marginal cost = TC QxQx

5. TVC TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91

6. TC TVC TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103

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

8. 7.7 Sales (Q) Average revenue (AR) Total revenue (TR) Marginal revenue (MR) 1300 2280560260 3 780220 4240960180 52201100140 62001200100 7180126060 8160128020 91401260-20 101201200-60

9. 7.8

10. QTFCTVCAFCAVCTCACMC 05000-- -- 1 100500100600 100 25001802509068034080 35002501678375025070 45003101257881020260 55003801007688017670 6500470837897016290 750058071831080154110 850073063911230154150 9500930561031430159200 7.9

11. 7.10

12. 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)