Cost curve

COST & REVENU
CONCEPTS
PRESENTED BY:-
PRADEEP MALIK
(4151048)

Cost Concept:
 It is used for analyzing the cost of a
project in short and long run.
• Cost Concepts which are relevant to
business operations and decisions can be
based on 2 categories
1. Concepts used for accounting purposes
2. Analytical cost concepts

Opportunity cost
 The opportunity cost may be defined as the expected returns form
the second best use of the resources which foregone due to the
scarcity of resources. The opportunity cost is also called alternative
cost. Had the resource available been unlimited, there would be no
opportunity cost.
Actual Costs
 Actual costs are those which are actually incurred by the firm in
payment for labor, material, plant, building, etc.

Full Costs includes business costs, opportunity cost and normal
profit.
Full Costs
Explicit and Implicit Costs
 Explicit costs are those which fall under actual costs entered in the
books of accounts
 In contrast, there are costs that do not take the form of cash outlays
nor do they appear in the accounting system. Such costs are called
Implicit or Imputed Costs.

Out of Pocket and Book Costs
 The items of which involve cash payments, both
recurring and non-recurring, are known as out-of-
pocket costs
 There are certain actual business costs which do
not involve cash payments, but a provision is
made in the books of accounts and they are
taken into account while making the profit and
loss accounts. Such expenses are known as
book costs.

Incremental and Sunk Costs
• Incremental costs are closely related to marginal
costs but while marginal refers to the cost of the
marginal unit of output, incremental costs refers
to the total additional cost associated with the
expand in output
• Sunk Costs are those which cannot be altered,
increased or decreased by varying the rate of
output

 Total Fixed Costs (TFC)
 Total Variable Cost (TVC)
 Total Cost (TC=TFC+TVC)
 Average Fixed Costs (AFC)
 Average Variable Cost (AVC)
 Average Total Cost (ATC=AFC+AVC)
 Marginal Cost (MC)
TYPES

Fixed Costs(FC)
Fixed Cost denotes the costs which do not
vary with the level of production. FC is
independent of output.
Eg: Depreciation, Interest Rate, Rent, Taxes
 Total fixed cost (TFC):
All costs associated with the fixed input.
 Average fixed cost per unit of output:
AFC = TFC /Output

Variable Costs(VC)
Variable Costs is the rest of total cost, the part that
varies as you produce more or less. It depends
on Output.
Eg: Increase of output with labour.
 Total variable cost (TVC):
All costs associated with the variable
input.
 Average variable cost- cost per unit of output:
AVC = TVC/ Output

Total costs(TC)
The sum of total fixed costs and
total variable costs:
TC = TFC + TVC
Average Total Cost
Average total cost per unit of output:
ATC =AFC + AVC
ATC = TC/ Output

Marginal Costs
 The additional cost incurred from
producing an additional unit of output:
MC =  TC
 Output
MC =  TVC
 Output

Typical Total Cost Curves
 TVC,TC is always increasing:
 First at a decreasing rate.
 Then at an increasing rate

Typical Average & Marginal Cost
Curves

 AFC is always declining at a
decreasing rate.
 ATC and AVC decline at
first, reach a minimum, then
increase at higher levels of
output.
 The difference between
ATC and AVC is equal to
AFC.
 MC is generally increasing.
 MC crosses ATC and AVC at
their minimum point.
 If MC is below the average
value:
 Average value will be
decreasing.
 If MC is above the average
value:
 Average value will be
increasing.

Short-Run Cost
The ATC curve is also U-
shaped.
The MC curve is very
special.
Where AVC is falling, MC is
below AVC.
Where AVC is rising, MC is
above AVC.
At the minimum AVC, MC
equals AVC.

Short-Run Cost
Similarly, where ATC is
falling, MC is below ATC.
Where ATC is rising, MC is
above ATC.
At the minimum ATC, MC
equals ATC.

Short-Run Cost
Cost Curves and Product Curves
The shapes of a firm’s cost curves are determined by the
technology it uses:
MC is at its minimum at the same output level at which
marginal product is at its maximum.
When marginal product is rising, marginal cost is falling.
AVC is at its minimum at the same output level at which
average product is at its maximum.
When average product is rising, average variable cost is
falling.

Long-Run Cost
Short-Run Cost and Long-Run Cost
The average cost of producing a given output varies and
depends on the firm’s plant size.
The larger the plant size, the greater is the output at which
ATC is at a minimum.
Cindy has 4 different plant sizes: 1, 2, 3, or 4 knitting
machines.
Each plant has a short-run ATC curve.
The firm can compare the ATC for each given output at
different plant sizes.

Long-Run Cost
ATC1 is the ATC curve for a plant with 1 knitting machine.

Long-Run Cost
ATC2 is the ATC curve for a plant with 2 knitting machines.

Long-Run Cost

Long-Run Cost
The long-run average cost curve is made up from the
lowest ATC for each output level.
So, we want to decide which plant has the lowest cost for
producing each output level.
Let’s find the least cost way of producing a given output
level.
Suppose that Cindy wants to produce 13 sweaters a day.

Long-Run Cost
13 sweaters a day cost $7.69 each on ATC1.

Long-Run Cost

Long-Run Cost
The least-cost way of producing 13 sweaters a day

Long-Run Cost
Long-Run Average Cost Curve
The long-run average cost curve is the relationship
between the lowest attainable average total cost and
ouptut when both the plant size and labor are varied.
The long-run average cost curve is a planning curve that
tells the firm the plant size that minimizes the cost of
producing a given output range.

Long-Run Cost
Figure 10.8 illustrates the long-run average cost (LRAC) curve.

Long-Run Cost
Economies and Diseconomies of Scale
Economies of scale: falling long-run average cost as
output increases.
Diseconomies of scale: rising long-run average cost as
output increases.
Constant returns to scale: constant long-run average
cost as output increases.

Revenue
Revenue is the money payment received
from the sale of a commodity.

Types of Revenue
1. Total Revenue
2. Average Revenue
3. Marginal Revenue

Total Revenue
TR is defined as the total or aggregate of
proceeds to the firm from the sale of a
commodity.
Symbolically,
TR = P X Q
P = Price
Q = Quantity

Average Revenue
Average Revenue is the revenue per unit
of output sold.
Symbolically,
AR = TR
Q
Or, AR = P X Q
Q
Or, AR = P
AR is always identical with the price.

Marginal Revenue
Marginal Revenue is the revenue received by
selling one extra unit of output.
OR
Marginal Revenue is the addition made to total
revenue when one more unit of output is sold.
MR = Change in Total Revenue
Change in Quantity Sold
MR = ΔTR
Δ Q
Also, MR n = TR n – TR n-1

Firm’s Revenue curves under
Perfect Competition
 It is a market situation where a firm is a price
taker. There are so many buyers and sellers in
the market that no individual buyer or seller
can influence the price of a commodity. Any
variation in the output supplied by a single
firm will not affect the total output of the
industry. No individual buyer can influence
the price of the commodity by his decision to
vary the amount that he would like to buy.
Price in perfect competition market is
determined by the free play of the market
demand and supply curve.

TR, AR, MR schedule under
Perfect Competition
Here, AR=P=d
AR=MR
Units sold Price (P) TR AR MR
1
2
3
4
5
10
10
10
10
10
10
20
30
40
50
10
10
10
10
10
10
10
10
10
10

Graphical presentation of TR, AR,
MR under Perfect Competition
Revenue TR
50
40
30
20
10 P=AR=MR=d
0 1 2 3 4 5 Quantity

Cost curve

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