Presented by-

Simran
Kriti Pandey
Jatin Anand
Nabh Gupta
Riya Verma
COST
 COST
•Cost refers to
the total
expenses
incurred in the
production of
the commodity.
 Various concepts
of Cost
1. Fixed and Variable Costs
2. Opportunity or Alternative Cost
3. Money Cost – Explicit & Implicit Costs
4. Accounting & Economic Costs
5. Real Cost
Short run
 Short run costs

Total cost

TFC TVC TC
 • TFC is the total costs of the fixed assets.
TFC • It is a constant amount.

• TVC is the total costs of the variable assets.

TVC • TVC increases as more variable factors are used.

• Total costs of all fixed and variable factors.

TC • TC=TFC+TVC
 TC,TVC and TFC Curves
Labour TFC TVC TC
0 400 0 400
1 400 200 600
2 400 400 800
3 400 600 1000
4 400 800 1200
5 400 1000 1400
6 400 1200 1600
7 400 1400 1800

• Total costs is the actual money spent to produce a particular quantity of output.
• Total cost is the summation of Total Fixed and Variable cost
• • Formula to calculate : TC = TFC + TVC
 AVERAGE
COST

AVC AFC ATC

 • AFC is the fixed cost per unit of output.
AFC • AFC=TFC divided by output

• AVC is the variable cost per unit of output.

AV • AVC=TVC divided buy output.
C
• ATC is the total cost per unit of output.
AT • ATC= TC divided by output.
C
MARGINAL COST
Marginal Cost is the increase in the total
cost of producing an extra unit of output.
 Tabular Form of AFC, AVC, ATC and MC

• Average Cost : AC = TC/Q

• Average Fixed Cost : AFC = TFC/Q
• Average Variable Cost : AVC = TVC/Q
• Marginal Cost (MC) is the addition to the total cost
due to the production of an additional unit of product
• MC = Change in Total Cost / Change in Total Output
AFC,AVC,ATC and MC
Curves
RELATIONSHIP BETWEEN ATC, AVC, AFC
AND MC CURVES
Long run
Attainable

Unattainable
 Activity

Total Total Average Average Average

Units of Fixed Variable Total Cost Fixed Cost Variable Cost Cost Margina
Output Cost Cost (TC=TFC (AFC=T (AVC = (AC=TC/ l Cost
(Q) (TFC) (TVC) +TVC) FC/Q) TVC/Q) Q) (MC)

1 60 20
2 60 36
3 60 42
4 60 64
5 60 95
 Total Total Total Averag Avera Mar
Unit Fixe Varia Cost e Fixed Average ge gina
s of d ble (TC= Cost Variable Cost l
Outp Cost Cost TFC (AFC= Cost (AC= Cost
ut (TFC (TVC +TV T (AVC = TC/ (MC
(Q) ) ) C) FC/Q) TVC/Q) Q) )
1 60 20 80 60 20 80 0
2 60 36 96 30 18 48 16
3 60 42 102 20 14 34 6
4 60 64 124 15 16 31 22
5 60 95 155 12 19 31 31
 REVENUE
The amount
of money
earned by a
business after
a sale is
made.
Revenue is the total amount of income generated by the
sale of goods or services related to the company's primary
operations. Revenue, also known as gross sales, is often
referred to as the "top line" because it sits at the top of the
income statement.
 Difference between Income and
Revenue
The revenue number is the income a company generates
before any expenses are taken out.

Where as,
Income is calculated by taking revenues and subtracting
the costs of doing business, such as depreciation, interest,
taxes, and other expenses.
Types of revenue

Total
revenue

Average Marginal
revenue revenue
 Total revenue
Total revenue is the total receipts a seller can obtain
from selling goods or services to buyers.

FORMULA: TR= P×Q

where P stands for Price
Q stands for Quantity

Suppose, a factory is selling 500 soft toys at the rate of Rs. 20 per toy then ,
TR=20×500 = Rs. 10000
 AVERAGE REVENUE
Average revenue is referred to as the revenue that is
earned per unit of output.
FORMULA: AR= TR÷Q

Where TR stands for total revenue

and Q for quantity

Suppose, a factory has earned Rs 1000 by selling 100 quantities, then

AR = 1000/100 =Rs 10
 MARGINAL REVENUE
Marginal revenue refers to the incremental change in
earnings resulting from the sale of one additional unit.
FORMULA: MR= ∆R÷∆Q

Marginal Revenue= Change in Revenue/ Change in

Quantity

Suppose, a company’s TR is Rs 12, 000 when 12 units of commudity are sold

and it is Rs 13,000 when 13 units of commudity are sold , then
MR = (13000-12000)/ 1
=Rs 1000
Graphical representation
 Relationship between Marginal revenue
and Total revenue
a) When AR is decreasing, MR should be decreasing faster than
AR. Thus, downward sloping MR curve is below the downward
sloping AR curve.
b) If AR is constant, MR is equal to AR. Both are
indicated by the same horizontal straight line.
c) MR can be negative, but not AR.
 Calculation of TR, MR, AR

Output (Q) Price (P) TR (P×Q) AR (TR/Q) MR(∆TR/∆Q)

(P)
1 5 5 5

2 6 12 6 12-5/2-1= 7

3 7 21 7 21-12/3-2= 9
 CASE STUDY

Beer or Cancer?

Assume that the government provides $50,000/year for the

department X to conduct cancer research,  and the costs of
operating the research lab is $30,000. Philips offers
$70,000/year to do beer research, but researching beer would
increase costs by $5,000.

Questions-
1) What is the opportunity cost of conducting cancer research?
Break this into implicit and explicit costs.
2) What option will the department choose? What are the
opportunity costs of this choice?
3) What is the total economic profits from this choice?
Solutions
•1) Since we know opportunity cost is explicit + implicit costs, all we need is
the implicit cost of the next best option. In this case, when we conduct
cancer research we forgo $35,000 of profits. This means:
•Explicit Costs (lab operating costs): $30,000
•Implicit Costs (forgone profits from Philips): $35,000
•Opportunity Costs (Implicit + Explicit): $65,000
 
2) Since we have already calculated the accounting profits and know
that Cancer research gives $20,000 of profits, whereas beer provides
$35,000, we know that the department will choose beer research.
Finding opportunity costs is the same process as before, except now
our explicit costs are the operating costs of the beer lab, and our
implicit costs are the forgone profits from cancer research.
Explicit Costs (lab operating costs): $35,000
Implicit Costs (forgone profits from Cancer research): $20,000
Opportunity Costs (Implicit + Explicit): $55,000
•3) Economic profits are the difference between total
revenue and all the costs of an action, implicit and
explicit. With a total revenue of $70,000 from Philips,
our economic profits are equal to $70,000 minus our
previously calculated opportunity costs. Since $70,000 –
$55,000 = $15,000, our economic profits from beer
research are $15,000.
Thank You