<3.7 FIRM'S COSTS, REVENUES & OBJECTIVES> 

COSTS refers to: "The money ($) that the firm pays to obtain its productive resources such as raw materials and machinery, to make its product/service (In other words costs are the money that 'goes out' of the business)" In the case of this school it is mainly made up of teacher's salaries and building costs.

• Can you list at least 5 COSTS for Starbucks?

• FIXED COSTS are "COSTS THAT DO NOT CHANGE WHEN OUTPUT CHANGES". Examples of fixed costs include RENT, PROPERTY TAXES, INSURANCE premiums, and INTEREST on loans. 

  • • Therefore TOTAL FIXED COSTS (TFC) 

• VARIABLE COSTS are "COSTS THAT VARY (CHANGES) AS OUTPUT CHANGES", Examples include WAGES for LABOUR, ELECTRICITY & WATER BILLS, RAW MATERIALS etc...

  • • Therefore TOTAL VARIABLE COSTS (TVC) 

--"What is the total costs of making Q amount of X?"--

• TOTAL COSTS are "ALL COSTS THAT CHANGE OR DO NOT CHANGE WHEN OUTPUT CHANGES". in other words TOTAL COSTS at a particular amount of output (Q) are the SUM OF FIXED & VARIABLE COSTS.

  • • Therefore TOTAL COSTS (TC) 

--"What is the price per unit of X?"--

• AVERAGE COSTS therefore are "THE AVERAGE COST PER UNIT OF OUTPUT", which we discussed before, when we discussed how large firms can lower these average costs through ECONOMIES OF SCALE.

-- TOTAL COST (TC) = TFC + TVC --

-- AVERAGE TOTAL COST (ATC) = TC / Q --

-- AVERAGE FIXED COST (AFC) = TFC / Q --

-- AVERAGE VARIABLE COST (AVC) = TVC / Q --

Sketch the diagram above, and explain their shape

REVENUE refers to: "The money ($) that the firm receives (In other words, it is the money that 'comes into' the business) when it sells its product" in the case of this school it is mainly made up of your study fees.

• Can you list at least 5 SOURCES of REVENUE for Apple.

"What is the total revenue from selling Q amount of X?"

TOTAL REVENUE = PRICE PER UNIT * QUANTITY SOLD

TOTAL REVENUE/QUANTITY SOLD = AVERAGE REVENUE

AVERAGE REVENUE = PRICE PER UNIT

PROFIT/LOSS = TOTAL REVENUE (TR) - TOTAL COST (TC)

--If TR($In) > TC($Out), the firm earns PROFIT--

--If TR($In) < TC($Out), the firm makes a LOSS--

--PROFIT MAX = 'GAP between TR and TC is GREATEST'--

"Why is it PROFIT MAXIMISATION an objective?"

• It may sound like a silly question as profit is usually the INCENTIVE or REWARD NEEDED by PRIVATE ENTREPRENEURS to TAKE RISKS, WITH BOTH THEIR TIME AND MONEY, as often it requires BORROWING MONEY and GOING INTO DEBT, so without profit they won't survive.

• This is why 100% of Shark-Tank pitchers are seeking profit, as they have taken on so much risk in developing their business, and desperately want their sacrifice to be rewarded.

• "Why do the Sharks still invest in firms that are not profitable, even loss-making?", "The answer is they see the 'growth potential of the firm", "But why is it important?", "How can growth lead to profits?"

• GROWTH refers to INCREASES IN MARKET SHARE (This refers to how much of the total customers as a % you have eg. 10%, 50% etc...) which are important for the following reasons....

  • • • LARGER SCALE => HIGHER SALES => HIGHER PROFITS?

      • LARGER SCALE => ECONOMIES OF SCALE => LOWER AV. COSTS

      • LOWER AV. COSTS => GREATER COMPETITIVENESS

      • GREATER COMPETITIVENESS => MORE MARKET POWER

      • MORE MARKET POWER => MONOPOLY POWER

      • MONOPOLY POWER => ABLE TO LIMIT COMPETITION 

      • MONOPOLY POWER => ABLE TO RAISE PRICE => MORE PROFIT

      • A GROWING COMPANY => MORE INVESTORS (SHARK TANK????)

      • MORE COLLATORAL => MORE SECURITY IF DOWNTURN

      • LARGER SCALE => DIVERSIFY RISK

      • LARGER SCALE => MOTIVATED STAFF???

  • REAL-WORLD EXAMPLE: LARQ (self-cleaning water bottles) hadn’t yet turned a profit due to R&D and marketing, however Kevin O'Leary offered $1 million for 4% equity as he believed that it had high growth potential in sustainable consumer tech. LINK

"If you lost all your customers due to a natural disaster, an epidemic like COVID, or an economic downturn (recession), would profit maximisation and growth really feel that important?"

Of course not, you would be much more concerned about survival, or at least getting out with the minimum of losses.