Chapter 06: Costs and Revenue

Explainer

What you must be able to do

• calculate and describe the relationship between total, marginal and average revenue and costs (ie TC, MC, AC, TR, MR, AR)
• Use the difference between the short run and the long run to explain what a firm’s costs and revenues mean for its decisions (like output, pricing, and whether to stay in the market).
• explain and illustrate (using a graph) the profit maximising condition of a firm
• analyse the role of economies and diseconomies of scale in determining the size of firms
• critique the reasons a firm may pursue objectives other than profit maximisation

Core ideas

This chapter is quite technical but there's a good mix of content. Calculations, graphs, definitions and more rigourous statement/explanation topics all feature prominently in this chapter, so you'll gain lots of useful skills.

The graphing of costs and revenue curves in this chapter will lay the groundwork for the graph-drawing in the Market Structures chapter.

Exam focus

Exam questions on this chapter can cover a wide array of material, and can pop up anywhere in the exam. There is a lot of theory in the lecture slides, but the graphs are very frequently examined too. Never forget to label graphs. Always use arrows to indicate the direction of prices/quantity/equilibrium.

Interactive: Cost Curves

Explore how Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC) relate to each other. Use the price slider to set a market price and see whether the firm is making a profit or a loss.