TotalRevenue
Total revenue (TR) is the total number of dollars a firm
receives from people who buy its product(s). Total revenue
can be computed by multiplying the price (P) of each unit sold
s . T
i :
by the quantit Y.sold
\ '\~
.
5l
......
""""
.,._
al revenue== pr ice (P) X quantity (Q)
and
'5<\'\]5 I\L\~50
57
. 5
profits= total revenue (PX Q) - total cos s (1),
~d-'$
If you sold 50 jars of peanut butter, and the price of each jar
was $2.50, what would be your total revenue? If the cost of
production was $1.00 per jar, what would be your profit?
Page1
TotalCosts,FixedCosts,VariableCosts,and
MarginalCost
In this section, we'll work with a hypothetical transportation
firm called On-the-Move. Total costs (TC) are the sum of all
costs incurred by a firm in producing goods or services. Fixed
costs (FC) and variable costs (VC) are the two key components
of total costs. By definition, total costs equal fixed costs plus
variable costs; or, in symbols, TC = FC + VC.
Page2
The Short-Runand the T,ong-Run
Distinguishing the short-run from the long-run is the key to
distinguishing fixed costs (FC) from variable costs (VC). The
short-run and the long-run are two broad categories into which
economists parcel time. The short-run is the period of time
during which it is not possible to change all the inputs to
production; only some inputs, such as labor, can be changed.
The long-run , in contrast, is long enough that all inputs,
including capital, can be changed. Economists frequently use
the term capital (property owned by a firm) as an example of a
factor that does not change in the short-run and use labor
(workers or hours) as an example of a factor that can change in
the short-run.
Page3
The Short-Runand the T,ong-Run-Questions
37. Whi h of the following 11UST b tru of the
long rut1?
A
(B)
C
D
(E
Page4
It i at lea t one year in duration.
All fa tor of produ tio11are variable.
At lea t 011 fa tor of production i fix d .
Marginal co t are con tant.
A ,,erage total o t ar con tant.
The Short-Runand the T,ong-Run-Questions
37. Whi h of the following 11UST b tru of the
long rut1?
A
(9 )
C
D
(E
Page5
It i at lea t one year in duration.
All fa tor of produ tio11are variable.
At lea t 011 fa tor of production i fix d.
Marginal co t are con tant.
A ,,erage total o t ar con tant.
Costsfor On-the-Move
The table below illustrates the following definitions for Onthe-Move: total costs (TC), fixed costs (FC), and variable costs
(VC), each of the three costs' averages, and each unit's
marginal costs. The costs, exce for the fixed costs, increase
as outp~t increases.
Cff\
e_( o~e ::. Oe.r~~. \ ~
~
Quantity
( p ianos moved
per day)
(Q)
@
l
2
3
4
5
6
0~
450
570
670
780
900
l ,040
300
300
300
300
300
300
300
7
1,200
300
8
9
10
1l
l ,390
1,960
300
300
300
2,460
300
I TC = FC~
Page6
1, 640
Av e r a ge
Va r iable
Cost (AVC)
Vl \ \
Average
Tota l Cost
(ATC)
Ave
e
Fixed Cos t
(AFC)
Marginal
Cost
(MC)
150
270
370
480
600
740
900
1,090
450
285
300
150
100
75
60
50
150
135
123
120
120
150
120
100
123
140
1 71
174
43
128
38
l ,340
182
196
223
33
136
149
160
190
250
166
3 20
196
500
0
223
195
180
173
1,660
2,160
ATC
TC
Q
30
27
AFC -
FC
Q
AVC =
~
1l 0
120
Change in TC
Change in Q
MarginalCost
Observe that the marginal cost (MC) declines at low levels of
production and then begins to increase again. Marginal cost
reaches a minimum of $100 when production increases from 2
to 3 units of output.
Quantity
(pianos moved
per day)
(Q)
0
l
• 2
a3
4
5
6
7
8
9
10
l l
TC = FC
Page7
~
Total
Costs
(TC)
Fixed
Costs
(FC)
Variable
Costs
(VC)
300
450
570
670
780
900
l ,040
l ,200
1,390
1,640
1,960
2,460
300
300
300
300
300
300
300
300
300
300
300
300
0
150
270
370
480
600
740
900
1,090
1,340
1,660
2, 160
VC
Average
Total Cost
1
(ATC)
Average
Fixed Cost
(AFC)
450
300
150
100
75
60
285
223
195
180
173
l 71
174
182
196
223
ATC
TC
Q
so
43
38
33
30
27
AFC - FC
Q
Average
Variable
Cost (AVC)
150
135
123
120
120
123
128
136
149
166
196
AVC =
~
Marginal
Cost
(MC)
4/50
120
1oo•
lto
20
40
160
190
250
320
500
Change i n TC
Cha nge in Q
AverageTotal,Variable,and FixedCost
Average total cost (ATC) is defined as total costs (TC.)of
production divided by the quantity (Q) produced. In symbols,
ATC== TC/Q. For example, if the total costs of producing 4
items is $3,000, then the average total cost is $750 ($3,000 /4).
Another name for average total cost is cost per unit . Notice
that the ATC first decreases then increases.
Qu a n tity
(p i an o s mo v ed
per d a y )
(Q )
~
2
4
$
10
1l
I TC ~
Page8
174
182
196
223
1,390
1,640
1,,960
2.460
8
9
FC~
ATC
TC
Q
Marg i nal
Co st
( MC )
Av e r a g e
F i xed Cos t
(AFC)
A verage
V aria b le
Cos t ( A VC)
300
150
100
75
60
50
43
38
33
30
27
150
135
123
120
1 20
150
120
100
1 10
120
123
140
1 28
1 36
149
1 66
196
160
190
250
320
500
AFC = Fi
AVC =
~
Change
Change
in TC
in Q
AverageTotal,Variable,and FixedCost(cont.)
We can also define average cost for fixed and variable costs.
Average variable cost (AVC) is defined as variable costs
divided by the quantity produced: AVC == VC/Q. Average
fixed cost (AFC) is defined as fixed costs divided by the
quantity produced: AFC == FCIQ.
Quantity
( p ianos moved
per day)
(Q)
10
l l
Fixed
Variable
Costs
Costs
Costs
(TC)
(FC)
(VC)
300
450
570
670
780
900
1,040
300
300
300
300
300
300
300
~
1,200
300
1, 39 0
1,640
1,,960
2,460
300
300
300
300
3Z
~ 80
600
740
.-..
/l
/Ve.
/4,
cc=>
1,340
1,66 0
2, l 60
TC
Q
-...
(MC)
a
123
150
120
100
120
1 10
1 '.Z'O
166
120
140
160
190
250
320
196
500
123
.. <tfu
...
149
AFC - FC
Q
na l
Cost
Va riab l e
Cost (AVC)
ATC
Page9
Margi
Average
Total
AVC =
~
Change
in TC
Change in Q
AverageTotal,Variable,and FixedCosts-Questions
51. A fir111i pr du ino 100 unit f utput at at tal
t f $4 . Tl1 fir111"av rag variabl c t i
3 p r unit. hat i th fir111
~ t tal fix d c t?
A)
$1
B) $50
C $100
D $300
E $400
Page10
AverageTotal,Variable,and FixedCosts-Questions
51. A fir111i pr du ino 100 unit f utput at at tal
t f $4 . Tl1 fir111"av rag variabl c t i
3 p r unit. hat i th fir111
~ t tal fix d c t?
Page11
AverageTotal,Variable,and FixedCosts-Questions
Quantity of Output
(unit )
Total Variable Cost
0
$0
1
$40
2
$50
3
$65
4
$90
53. Assu,ne that the fixed co tis $50. Ba ed on the
cost and output data in the table above what is the
1narginal co t when the f1nn increa e its output
fro1n three to four unil and the average total co t
of producing 4 units?
(A)
(B)
(C)
(D)
(E)
Page12
Marginal Co t
Average Total Co t
$35
$35
$40
$25
$25
$10
$35
$35
$25
$25
AverageTotal,Variable,and FixedCosts-Questions
Quantity of Output
(unit )
Total Variable Cost
0
$0
1
$40
2
$50
3
$65
4
$90
53. Assu,ne that the fixed co tis $50. Ba ed on the
cost and output data in the table above what is the
1narginal co t when the f1nn increa e its output
fro1n three to four unil and the average total co t
of producing 4 units?
Marginal Co t
Average Total Co t
(A)
(B)
$35
$35
$40
(E)
$25
$25
$10
<
e
(D)
Page13
$35
$35
$25
$25
Microeconomics Do-Now
Please do this:
1. Show with numbers the correlation between (hint: mean)
a. TC and ATC
b.FCandAFC
c. VC and AVC.
2. Create a graph showing the correlation between TC, FC,
and VC.
3. What is another term for describing ATC?
Page14
Productionand Costs
Total costs (TC) depend on the quantity produced. Total costs
are what a firm has to incur financially in order to produce
their product(s), the fixed costs (FC) and the variable costs
(VC). We must look at what happens to the quantity of labor
and land used by an agricultural firm when the quantity
produced increases or decreases. Our analysis of a pumpkin
firm in this chapter is called a short-run analysis because the
time is too short to change some factors of production, such as
the land. Only labor (the number of workers and how many
hours they work) can be changed.
Page15
A Firm'sProfits
Profit for any firm, Publix or a farm producing pumpkins, is
defined as the total revenue (TR,) (the total number of dollars a
firm receives) received from selling a product minus the total
costs (T() of producing the product. That is:
profits== total revenue (TR) - total costs (TC)
When profits are negative, when total revenue is less than total
costs, a firm runs a loss (Blockbuster, Sports Authority, and
soon to be Kmart and Sears, etc.). When profits are zero, when
total revenue is equal to total costs, the firm is breaking even.
We always assume that a firm tries to maximize profits. If you
earned $1,100 from a garage sale, but it cost $100, what would
be your profit?
Page16