Objectives of firms: survival, social welfare, profit maximisation and growth

Firms’ Costs, Revenue and Objectives (Cambridge IGCSE Economics 0455 – Sub‑topic 3.6)

1. Costs

1.1 Key definitions

• Total Cost (TC) – the overall cost of producing a given level of output.
• Fixed Cost (FC) – costs that do not vary with output (e.g., rent, salaries of permanent staff).
• Variable Cost (VC) – costs that change directly with the level of output (e.g., raw materials, hourly wages).
• Average Total Cost (ATC) – cost per unit of output.
  

  Formula: ATC = TC ÷ Q

• Average Fixed Cost (AFC) – fixed cost per unit of output.
  

  Formula: AFC = FC ÷ Q

• Average Variable Cost (AVC) – variable cost per unit of output.
  

  Formula: AVC = VC ÷ Q

Reminder (syllabus point): ATC = AFC + AVC at every level of output.

1.2 How‑to‑calculate (numeric examples)

1.3 Drawing & interpreting the cost‑curve diagram (step‑by‑step checklist)

1. Label the horizontal axis “Quantity (Q)” and the vertical axis “Cost (£)”.
2. Plot three separate curves:

   • AFC – starts high on the vertical axis and falls continuously as Q increases.
   • AVC – falls, reaches a minimum, then rises (reflects diminishing returns).
   • ATC – the sum of AFC and AVC; therefore it is U‑shaped and lies above both curves.

3. Mark the point where ATC is at its minimum – this is the output at which the firm enjoys the lowest average cost (economies of scale start to reverse).
4. Label the vertical distances:

   • Distance between ATC and AFC = AVC.
   • Distance between ATC and AVC = AFC.

5. Use the diagram to explain why ATC = AFC + AVC at every quantity.

2. Revenue

2.1 Key definitions

• Total Revenue (TR) – total amount received from selling output.
  

  Formula: TR = P × Q

• Average Revenue (AR) – revenue per unit of output.
  

  Formula: AR = TR ÷ Q = P (in a perfectly competitive market).

2.2 How‑to‑calculate (numeric example)

2.3 Typical revenue‑curve diagram (suggested notes)

• Perfect competition: AR (and MR) is a horizontal line at the market price.
• Monopoly: AR slopes downwards; the MR curve lies below AR.

3. Objectives of Firms

3.1 Why objectives matter

Firms choose production levels, pricing, and investment decisions based on the objective(s) they pursue. The Cambridge IGCSE syllabus recognises four main objectives:

1. Survival
2. Social welfare
3. Profit maximisation
4. Growth

3.2 Survival

• Most basic objective – the firm must at least cover its costs to stay in business.
• Short‑run condition: TR ≥ TVC. If TR < TVC the firm shuts down temporarily (still pays fixed costs).
• Long‑run condition (break‑even): TR = TC. If TR < TC the firm incurs a loss and will exit the market in the long run.
• Break‑even point is shown where the TR line meets the TC line on a graph.

3.3 Social welfare

• Typical of public utilities, NGOs, co‑operatives and many state‑owned enterprises.
• Goal: provide essential goods or services at affordable prices, even if this means operating at a loss or relying on subsidies.
• Key features:

  1. Broad service coverage (e.g., water, electricity, healthcare).
  2. Price setting below market equilibrium to maximise accessibility.
  3. Any surplus is reinvested in community projects rather than distributed as profit.

3.4 Profit maximisation

• Dominant objective for most private‑sector firms.
• Firm chooses the output where the difference between TR and TC is greatest.
• Short‑run rule: MR = MC. Producing one more or one less unit would reduce profit.
• In perfect competition, MR = P, so profit maximisation occurs where P = MC (provided P > AVC).

3.5 Growth

• Desire to increase the firm’s size, market share, product range or geographic reach.
• Reasons for seeking growth:

  1. Achieve economies of scale – lower ATC as output expands.
  2. Enhance market power and bargaining strength.
  3. Diversify risk across different products or markets.

• Typical growth strategies:

  1. Internal expansion – reinvest profits to increase capacity.
  2. Mergers and acquisitions.
  3. Entering new domestic or overseas markets.

4. Comparison of Objectives

5. Interplay Between Objectives

• Objectives are rarely pursued in isolation. A firm may aim for profit maximisation in the short run to secure survival, while planning long‑run growth.
• Publicly owned firms often combine social‑welfare goals with the need to remain financially viable (survival).
• A growth strategy that yields economies of scale can lower ATC, thereby supporting both profit maximisation and long‑run survival.

6. Suggested Revision Diagrams

1. Cost curves: ATC, AFC and AVC on the same graph; highlight the ATC minimum point.
2. Revenue‑cost intersection (survival): TR and TC curves intersect at the break‑even point.
3. Profit‑maximisation: MR and MC curves intersect; shade the area between TR and TC to illustrate profit.
4. Growth & economies of scale: Two ATC curves (small‑scale vs. large‑scale) to show how average cost falls as output expands.

7. Summary

• Firms incur fixed and variable costs; ATC = AFC + AVC and is used to assess efficiency.
• Revenue is calculated as TR = P × Q; AR equals price in competitive markets.
• Survival requires covering costs (TR ≥ TVC short‑run; TR ≥ TC long‑run).
• Profit‑maximising firms produce where MR = MC.
• Social‑welfare firms prioritise community benefit over profit.
• Growth aims to increase scale, market power and reduce average costs.
• In practice, firms balance several objectives simultaneously.