I. Profits
Profits = (P – C)Q. Where P = Average Price; C = Average Cost and Q = Quantity
In order to maximize profits atleast one of the following should occur (i) increase average price; (ii) decrease average costs; or (iii) increase quantity. * Relationship between Price and Quantity – If you sell more then lower the price /margin and vice versa * Relationship between Cost and Quantity – Economies of Scale – Increase in quantity allows one to decrease costs and vice versa.

II. Cost Concepts
Total Costs = Fixed Costs + Variable Costs
Average Costs = Total Costs/Quantity
Marginal Costs (MC) = Incremental Cost of producing one Additional Unit
Marginal Revenue (MR) = Incremental Cost of selling one Additional Unit

Marginal revenue/cost example - For example if you can sell 10 units at £20 each or 11 units at £19 each, then your marginal revenue from the eleventh unit is (10 × 20) - (11 × 19) = £9. Accordingly, as long as the extra revenue from selling one more unit is greater than the extra cost of making it, it is profitable to do so.

MR exceeds MC - increase profits by lowering price to sell additional units
MC exceeds MR – increase price to sell fewer units.

Economies of Scale – Average Cost per unit decreases and qty produced increases
Diseconomy of Scale- Average Cost per unit increases and qty produced increases.

III. Fixed Costs and Variable Costs * Fixed costs do not vary and are independent of the quantity that you produce for e.g. rent, building machinery, etc. * Variable cost vary with the quantity that you produce e.g. wages, utilities, materials used in production, etc. * Some costs such as maintenance or advertising may have both fixed and variable components.

IV. Sunk versus Avoidable Costs * Costs that need to be incurred no matter what the decision are referred to as Sunk Cost. They have