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The Objectives of Firms

The Objectives of Firms. A2 Economics. What are the Objectives of Firms?. What do you feel are the main objectives of firms? Minimising Costs + Maximising Revenues = Maximising Profits. Aims & Objectives. Aim: Understand revenues in a perfectly and imperfectly competitive market.

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The Objectives of Firms

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  1. The Objectives of Firms A2 Economics

  2. What are the Objectives of Firms? • What do you feel are the main objectives of firms? Minimising Costs + Maximising Revenues = Maximising Profits

  3. Aims & Objectives Aim: • Understand revenues in a perfectly and imperfectly competitive market. Objectives: • Define Profit, TR, AR and MR. • Explain the relationship between Profit, TR, AR and MR in perfectly and imperfectly competitive markets. • Analyse the profit maximising output point for firms.

  4. Definitions • Profit = TR-TC. • Total Revenue = Price X No. Sold • Average Revenue = Total Revenue / No. Sold • Marginal Revenue = the addition to total revenue from production of one extra unit.

  5. Perfectly Competitive Market • In a perfectly competitive market, all units are sold at the same price. Task: Complete table 1.

  6. Perfectly Competitive Market Question 1) What do you notice about the average revenue and marginal revenue figures in relation to the price charged for each output level? • In a perfectly competitive market both the average revenue and the marginal revenue are constant as the same price is charged.

  7. Perfectly Competitive Market Task 2: Plot a graph with output along the x axis and price/revenue along the Y axis. Plot the average revenue points, the price points and the marginal revenue points. Label this line D = AR = MR = P. Price £s D = AR = MR = P 500 TR 500 x 5 Quantity 5

  8. Imperfectly Competitive Market • In an imperfectly competitive market, the selling price varies with output. Task: Complete table 2.

  9. Imperfectly Competitive Market Question 2) Average revenue and price remain the same but marginal revenue is less than the average revenue. Why? • As more units are sold the price of all units has to be reduced.

  10. Imperfectly Competitive Market Task 4: Plot a graph with output along the x axis and price/revenue along the Y axis. Plot the marginal revenue points and the average revenue points. Label these lines MR and AR. Price £s X 410 330 D=AR MR 3 Quantity

  11. Imperfectly Competitive Market • At 3 units AR = £410 at point X. • MR = £1,230 -£900 = £330 • £410 x 3 = Total Revenue Price £s X 410 330 D=AR MR 3 Quantity

  12. Where does a firm profit maximise? MR = MC This allows a firm to realise how many of a product to produce.

  13. Profit Maximising Output Revenue & Cost £s MC At 1 unit, MC is £20, MR is £50. This unit adds more to revenue than to cost and should be produced. 80 D = AR = MR = P 50 30 20 2 Quantity 1 3 4

  14. Profit Maximising Output Revenue & Cost £s MC At 2 units MC increases to £30 while MR remains at £50. This unit adds more to revenue than to cost and should be produced. 80 D = AR = MR = P 50 30 20 2 Quantity 1 3 4

  15. Profit Maximising Output Revenue & Cost £s MC At unit 4 MC is £80 while MR is £50. The firm should not produce here as more is added to costs than to revenues. 80 D = AR = MR = P 50 30 20 2 Quantity 1 3 4

  16. Profit Maximising Output Revenue & Cost £s MC It pays the firm to produce upto unit 3 where MC = MR. This is because included in costs is ‘Normal Profit’. 80 D = AR = MR = P 50 30 20 2 Quantity 1 3 4

  17. Plenary • Describe the relationship between AR, MR and P in a perfectly competitive market. • Describe the relationship between AR and MR in an imperfectly competitive market. • At what point does a firm reach its’ profit maximising output.

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