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Theory of the firm

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A Slideshow review the basic concepts of the Theory of The Firm.

Theory of the firm

  1. 1. Economics Definitions<br />Theory of the Firm<br />IB HL Economics<br />Will Congleton<br />
  2. 2. Fixed Costs<br />Fixed costs are costs of production that do not change based on output. They remain constant despite the number of products produced.<br />e.g. Building cost, Land<br />IB HL Economics<br />Will Congleton<br />
  3. 3. Fixed Cost Graph<br />Cost<br />Fc<br />Quantity<br />IB HL Economics<br />Will Congleton<br />
  4. 4. Variable Costs<br />Variable costs are costs of production that change based on output. They differentiate as the number of products produced changes.<br />e.g. Labor, Materials, Production<br />IB HL Economics<br />Will Congleton<br />
  5. 5. Variable Cost Graph<br />Vc<br />Cost<br />Fc<br />Quantity<br />IB HL Economics<br />Will Congleton<br />
  6. 6. Laws of Return<br />The laws of return dictate how much return is created based on output. The laws of return can be observed along the variable cost curve.<br />IB HL Economics<br />Will Congleton<br />
  7. 7. Law of Increasing Return<br />The law of increasing return states that for the first few factors of variable cost added, the increase in output will be greater than the increase in cost.<br />Vc<br />Cost<br />Increasing Return<br />Quantity<br />IB HL Economics<br />Will Congleton<br />
  8. 8. Law of Constant Return<br />The law of constant return states that for the following factors of variable cost added, the increase in output will be equal to the increase in cost.<br />Vc<br />Cost<br />Constant Return<br />Quantity<br />IB HL Economics<br />Will Congleton<br />
  9. 9. Law of Diminishing Return<br />The law of diminishing return states that for the final factors of variable cost added, the increase in output will be less than the increase in cost.<br />Vc<br />Diminishing Return<br />Cost<br />Quantity<br />IB HL Economics<br />Will Congleton<br />
  10. 10. Total Cost<br />The Total Cost is the combination of all factors of cost, namely variable and fixed costs. Represented as an equation, total cost is equal to the sum of the variable and fixed cost.<br />IB HL Economics<br />Will Congleton<br />
  11. 11. Total Cost Graph<br />Tc<br />Vc<br />Cost<br />Fc<br />Quantity<br />IB HL Economics<br />Will Congleton<br />
  12. 12. Total Revenue<br />TheTotal Revenue is the revenue generated from the sale of any number of products. As an equation, it is represented as price multiplied by the quantity sold.<br />IB HL Economics<br />Will Congleton<br />
  13. 13. Average Revenue<br />The Average Revenue is the revenue received as an average for each product sold. That is, it is the total revenue divided by the quantity produced. On a graph, average revenue is assumed to be equal to the demand for a product<br />IB HL Economics<br />Will Congleton<br />
  14. 14. Average Revenue Graph<br />Cost<br />Ar = D<br />Quantity<br />IB HL Economics<br />Will Congleton<br />
  15. 15. Marginal Revenue<br />TheMarginal Revenue is the revenue gained by selling an additional unit of a good or service. Graphically, is it generally assumed to be equivalent to half of the Ar value, though this relationship is not always true.<br />IB HL Economics<br />Will Congleton<br />
  16. 16. Marginal Revenue Graph<br />Cost<br />Ar = D<br />Quantity<br />IB HL Economics<br />Will Congleton<br />Mr<br />
  17. 17. Average Cost<br />The Average Cost is the average cost of production per unit. Represented as an equation, the average cost is the total cost divided by the quantity produced. Graphically the average cost is usually curved, representing the idea of diminishing return.<br />IB HL Economics<br />Will Congleton<br />
  18. 18. Average Cost Graph<br />Cost<br />Ac<br />Ar = D<br />Quantity<br />IB HL Economics<br />Will Congleton<br />Mr<br />
  19. 19. Marginal Cost<br />TheMarginal Cost is the additional cost of producing an additional unit of output. As an equation, it can be represented as half of the average cost, though more often than not it deviates from this qualification. <br />IB HL Economics<br />Will Congleton<br />
  20. 20. Marginal Cost Graph<br />Mc<br />Cost<br />Ac<br />Ar = D<br />Quantity<br />IB HL Economics<br />Will Congleton<br />Mr<br />
  21. 21. Normal Profit<br />Normal Profit is when the revenue generated is equal to the cost of production. Graphically, this means that Q1 falls at a point on which Ar and Ac overlap, or are equal.<br />IB HL Economics<br />Will Congleton<br />
  22. 22. Normal Profit Graph<br />Mc<br />Cost<br />Ac<br />P1<br />Ar = D<br />Quantity<br />IB HL Economics<br />Will Congleton<br />Mr<br />Q1<br />
  23. 23. Abnormal Profit<br />Abnormal Profit is when the revenue generated is greater than the cost of production. Graphically, this means that Q1 falls at a point on which Ar is above, or greater than Ac. The area above the Ac point to the Ar intercept is equal to the profit generated by sales.<br />IB HL Economics<br />Will Congleton<br />
  24. 24. Normal Profit Graph<br />Mc<br />Cost<br />Ac<br />P1<br />Profit<br />Ar = D<br />Quantity<br />IB HL Economics<br />Will Congleton<br />Mr<br />Q1<br />
  25. 25. Short Run Average Cost (SRAC)<br />The Short Run Average Cost in the average cost as it changes based around changes in increase (or decrease) in production from a change in factors of production.<br />IB HL Economics<br />Will Congleton<br />
  26. 26. Short Run Average Cost<br />SRAC5<br />SRAC1<br />SRAC2<br />SRAC4<br />SRAC3<br />
  27. 27. Long Run Average Cost (LRAC)<br />The Long Run Average Cost in the average cost as all factors of production become variable, or subjected to change.<br />IB HL Economics<br />Will Congleton<br />
  28. 28. Long Run Average Cost<br />SRAC5<br />SRAC1<br />LRAC1<br />SRAC2<br />SRAC4<br />SRAC3<br />
  29. 29. Economies of Scale<br />Economies of Scale are any fall in long-run unit (average) cost that comes as the result of a firms change in production scale. Economies of scale can be shown on a short and long run graph.<br />IB HL Economics<br />Will Congleton<br />
  30. 30. Economies of Scale<br />SRAC5<br />SRAC1<br />LRAC1<br />SRAC2<br />SRAC4<br />SRAC3<br />Economies of Scale<br />
  31. 31. Diseconomies of Scale<br />Diseconomies of Scale are any an increase in long-run unit (average) cost that comes as the result of a firms change in production scale. Economies of scale can be shown on a short and long run graph.<br />IB HL Economics<br />Will Congleton<br />
  32. 32. Diseconomies of Scale<br />SRAC5<br />SRAC1<br />LRAC1<br />SRAC2<br />SRAC4<br />SRAC3<br />Diseconomies of Scale<br />Economies of Scale<br />

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