(a) Define the profit of a firm [4 marks] (b) With appropriate formula, explain the following revenue and cost concepts: (i) total revenue (TR); [4 marks] (...

Answer Details

(a) Profit of a firm. Profit is the financial surplus a firm earns when its total revenue from selling output exceeds its total cost of production over a given period. In symbols, \( \text{Profit} = TR - TC \). Economists distinguish accounting profit (revenue minus explicit money costs) from economic (normal and supernormal) profit, where cost also includes the opportunity cost of the entrepreneur's own resources. Profit rewards the entrepreneur for risk-bearing and organisation.

(b) Revenue and cost concepts.

(i) Total Revenue (TR): the total money a firm receives from selling a given quantity of output. \( TR = P \times Q \), where \( P \) is price per unit and \( Q \) is quantity sold. If 100 units sell at \( \text{N}5 \) each, \( TR = 100 \times 5 = \text{N}500 \).

(ii) Average Revenue (AR): revenue earned per unit of output sold. \( AR = \dfrac{TR}{Q} = P \). AR equals the price, so the AR curve is the firm's demand curve.

(iii) Marginal Revenue (MR): the addition to total revenue from selling one extra unit of output. \( MR = \dfrac{\Delta TR}{\Delta Q} \). Under perfect competition \( MR = AR = P \); under imperfect competition \( MR < AR \).

(iv) Average Fixed Cost (AFC): fixed cost per unit of output. \( AFC = \dfrac{TFC}{Q} \), where \( TFC \) is total fixed cost. Because \( TFC \) is constant, AFC falls continuously as output rises (the fixed cost is spread over more units), so the AFC curve slopes downward throughout.

Examination reminder: always attach the correct formula to each concept and note that profit is maximised where \( MR = MC \), not where TR is simply large.