Costs of production
A firm's costs are the payments it makes to produce output. Fixed costs do not change with the level of output in the short run, such as rent and salaries. Variable costs change directly with output, such as raw materials and power. Adding them gives total cost. Dividing total cost by the number of units gives average cost per unit.
Key idea
Total cost = fixed cost + variable cost. Average cost = total cost ÷ quantity produced.
Revenue
Revenue is the money a firm receives from selling its output. Total revenue = price per unit multiplied by quantity sold. Average revenue equals total revenue divided by quantity, which is the same as the price. A firm makes a profit when total revenue is greater than total cost, and a loss when total cost is greater than total revenue.
Example
If a firm sells 200 units at a price of RM5 each, total revenue is RM1000. If total cost is RM700, the firm makes a profit of RM300.
Objectives of firms
Not every firm aims only to make the largest possible profit. Common objectives include profit maximisation, survival (especially for new firms), growth in size or market share, and social aims such as protecting the environment or supporting the local community. A firm's objective influences the decisions it makes about price, output and investment.