Cost and Revenue

Prepared and presented by

Prof.D.yuvaraj

Nature of cost and cost curves

cost

An amount that has to be paid

or spent to buy or produce
something.

Production cost
DEFINITION
A cost incurred by a business when
manufacturing a good or producing a service.
Production costs combine raw material and
labour.

Real cost
Definition
The overall actual expense involved in
creating a good or service for sale to
consumers.

Opportunity cost
It refers to next best alternative cost,
A benefit, profit, or value of something that
must be given up to acquire or achieve
something else.

Private cost & social cost

Private Costs + External Costs = Social Costs
Private costs for a producer of a good or,
service, include the costs the firm pays to
purchase capital equipment, hire labour, and
buy materials or other inputs.
External cost- e.g. installing water pollution
control equipment

The cost function

Definition
A mathematical formula used to predict the
cost associated with a certain action or a
certain level of output.
It is divided as short run cost and long run
cost

cost curves
1 Short-run average variable cost curve
(SRAVC)
2 Short-run average total cost curve (SRATC
or SRAC)
3 Long-run average cost curve (LRAC)
4 Short-run marginal cost curve (SRMC)
5 Long-run marginal cost curve (LRMC)

Total cost
Total cost = Variable cost+ Fixed cost
Definition.
the sum of fixed costs, variable costs.

variable cost

Variable costs are costs that change in

proportion to the good or service that a
business produces

Fixed cost
Fixed costs which are necessary to start a
business, e.g., Buildings,machinary etc.
These are not dependent on the level of
goods or services produced by the business

Marginal cost

It refers to additional cost for producing extra

one unit.

Average cost- It refers to total cost

divided by quantity

Total cost curve

Marginal cost curve

TC,TVC,TFC CURVES

MC cuts at minimum point of AC

MC & MR

Short run cost curves

TC,TVC,TFC curves

Reserve capacity
It refers to excess capacity, which a firm not
using under imperfect competition

AFC

MC

Shape of different cost curves

Marginal cost & ATC,AVC

LRAC

Revenue curve under perfect

competition

Revenue curve imperfect competition

Revenue curve under oligopoly

Revenue curve under monopoly

Thank you