MARKET EQUILIBRIUM AND COST SEGREGATION

Shifting of demand curve, supply curve or both

1. Determinant- causing changes to the price of the product- mababago ang quantity supplied or
quantity demanded. These is only a move in the curve. There’s no shifting in supply or demand
curve

EQUILIBRIUM
- is a state where in the demand and supply are in balance
- the demand is the same to the quantity supplied of the product
- negatively slope- demand curve
- positively slope- supply curve, because as the demand increases the supply also
increases
- Demand= Supply
- No shortage nor surplus
- Government Influence:
Taxes- Higher EP
Subsidies- Lower EP
Rationing- Lower EP
Regulation- Price (government sets price)
Ceiling or Price Floor
- Price ceiling- is below equilibrium price (maximum price), creates shortage
- Floor Price- is above equilibrium price (minimum price), creates surplus

COST BEHAVIOR

Cost behavior patterns indicate how costs change in response to changes in production or sales. A
thorough understanding of cost behavior is necessary in order to perform cost-volume- profit analysis
and to prepare for production and sales budgets.

Cost behavior assumption

Relevant Range Assumption – refers to the range of activity within which the cost behavior patterns are
valid. It is also the level of activity where cost relationships exhibit under linear relationship. (kapag hindi
umabot sa relevant range, the cost is invalid)
Time Period Assumption – The cost behavior patterns identified are true only over a specified period of
time. Beyond this, the cost may show a different cost behavior pattern. (price flactuates)

Cost Estimation: Segregating Variable and Fixed Costs

The Cost Function: Y= Total costs

Y= a + bX
X = activity or cost driver

a = total fixed costs

b= variable cost per unit

bX = the total variable costs

 - Variable cost - As the level of production increases the total variable cost increases
- Variable cost per unit and fixed cost per unit- remains constant
- Total cost- depends on the level of activity, no. of units produced
- The greater number of units you produced the higher the amount of your total cost
- Dependent variable- Y
- Independent variable – X
- a & b – both constant
- total variable cost- not constant, directly related to X, as the level of activity increases
the
- Fixed per unit- habang tumataas ang elvel of production it decreases, inversely related
to X
- a is Y intercept- total amount of fixed cost
- b is the slope of the line – steepness
- Y = a + bX
- Slope = Rise/Run
- Rise- change in Y
- Run- Change in X

High-Low Points Method

Variable cost per unit (b) = Change in Cost (YH- YL)

Change in Activity (XH- XL)

- The fixed and variable components of the mixed costs are computed from the highest
and lowest points based on the activity or cost driver.
- Outlier- it’s either very high or very lower, it’s not normal. Must be ignored.