1) Profit Maximization2) Sales Revenue Maximization3) Growth (Large Market Share)4) Improving the environment5) 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

Output Total Revenue Total Cost Total Profit10 200 220 -2020 380 380 030 500 480 2040 600 540 6050 660 620 4060 700 710 -10

The profit is maximized at the output of 40 units

Profit Maximization

Output per week

Total Cost $ Total Revenue $

A 1,000 10,000 13,000

B 2,000 16,000 30,000

C 3,000 18,000 42,000

D 4,000 28,000 54,000

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

A 1,000 10,000 13,000 10 13 3,000

B 2,000 16,000 30,000 8 14 14,000

C 3,000 18,000 42,000 6 14 24,000

D 4,000 28,000 54,000 Check your Understanding7

13.5 26,000

Check your Understanding

1. At what level of output is average cost at a minimum? C2. At which level of output is average revenue at a maximum? B,C3. At what level is profit maximized? C

Total Output of Plastic Boxes

Total Cost ($)

0 100

100 800

200 1,500

300 2,200

400 2,900

500 3,600

600 4,300

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 ($)

0 100

100 800

200 1,500

300 2,200

400 2,900

500 3,600

600 4,300

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 / QVC = ($4,300- $100) / 600 = $7VC = ($800 - $100) / 100 = $7

P

Q1000

D

S

Firm

$15 $15

10

Total Revenue

Total Revenue

TR = Price * Quantity = 15,000

If there was an increase in Price, total revenue would:A. DecreaseB. Stay the SameC. IncreaseD. Cause the firm to fail

P

Q1000

D

S

Firm

$15 $15

11

Total Revenue

Total Revenue

TR = Price * Quantity = 15,000

If there was an increase in Price, total revenue would:A. DecreaseB. Stay the SameC. IncreaseD. Cause the firm to fail

Total Costs = Total Revenue

Or

Total Costs – Total Revenue = $0

Break Even 收支平衡

Revenue Costs

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

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 scaleB. Rising profitsC. Decreasing returns to scaleD. 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 scaleB. Rising profitsC. Decreasing returns to scaleD. 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