Hi, I'm Dr. Sangaralingam Ramesh.
Welcome to talk number 9 in this
Henry Stewart talk series "Introduction to Microeconomics".
In this talk we'll be evaluating,
and analyzing firm's costs and revenues and seeking to answer the question what
are the different types of costs and revenues
a firm faces in the context of its production?
Economists make the assumption that firms maximize profits.
So in this case we can define a firm's total profits as
being equal to total revenue minus total cost,
where total revenue is denoted by TR and total cost is denoted by TC.
In the context of total revenue TR we could say
that the firm's total revenue is simply equal to the price of
each unit that the firm sells times
the total quantities sold by the firm of the good that it produces.
However, in the context of a perfectly competitive market the price
is set by total market industry supply and demand.
Therefore, each firm in
a perfectly competitive market can accept the price and is known as a price taker.
So therefore the only decision that the firm
can make is about how much of the good to produce.
So in the context of a firm's output decisions,
if a firm can affect the price at which it sells its output,
what is the determinant of how much of the good the firm can produce?
The answer to this question depends on the firm's costs.
The higher the firm's costs the lower the quantity of the good it can produce,
and the lower the firm's costs the more units of the goods that the firm can produce.
In this context we also need to make
a distinction between the short run and the long run.
In the short run the firm can change
the quantity of capital and the quantity of labor used in production.
But in the long run the firm can change
both the quantity of capital and the quantity of labor used in production.
So in terms of the firm's short run total cost,
we can say that this can be represented by total fixed cost plus total variable cost.
The total fixed cost for a firm is the amount of money
that it spends for maintaining machines when there is no production,
and also the cost of security to look after the factory when the factory's close.
However, the firm's total variable costs depends on its level of production
and can be represented by the wages paid to
the workers and also the cost of raw materials,
and also the electricity which the firm uses
to power the machines which are used in production.
So in this case, short run total cost is
equal to total fixed cost plus total variable cost.
So in this case,
firms have to pay a total fixed cost
regardless of whether production is actually taking place.
But a firm's total variable costs will exhibit the Law of Diminishing Returns.
The Law of Diminishing Returns will get to look at in
the next talk but it's suffice now to say that the Law Diminishing Returns for firm's production occurs in the short run.
When as the firm hires more and more workers
each additional worker would have less and less machinery to work with.
So the firm's total variable costs increase as the wages paid to workers increases,
but the firm's production will begin to decrease
because each worker will be less and less productive.