COST & REVENUE

Different Measures of Cost

• Total Cost (TC) = FC+VC
– Fixed Cost (FC) – are costs that do not vary
with output. FC only are present in the short-
run are the result of fixed factors.
– Variable Cost (VC) – are costs that vary with
output. VC result from different levels of
fixed factors. All costs are VC in the long-run.
– Mathematically, Total costs can be represented
as,
TC = FC +VC
 Total Costs
TC
TVC
Fixed Cost
Costs (dollars)

Total Variable Cost

Cost
TFC
Quantity

3
 Marginal & Average Costs:
• Marginal Cost (MC) measures the cost of
producing another unit.
MC = Change in Total Cost
Change in Quantity Sold
MC= ΔTC
ΔQ
• Average Cost (AC) measures the cost of a
typical unit of output.
Mathematically,
TC/Q = FC/Q + VC/Q
ATC = AFC +AVC
 T he Marginal, Average Total,
Average Variable, and Average
Fixed Cost Curves
 Fixed Variable Total Marginal
Quantity Cost Costs Costs Costs

0 $ 3.00
1 $ 3.00 $ 0.30 $ 3.30 $ 0.30
2 $ 3.00 $ 0.80 $ 3.80 $ 0.50
3 $ 3.00 $ 1.50 $ 4.50 $ 0.70
4 $ 3.00 $ 2.40 $ 5.40 $ 0.90
5 $ 3.00 $ 3.50 $ 6.50 $ 1.10
6 $ 3.00 $ 4.80 $ 7.80 $ 1.30
7 $ 3.00 $ 6.30 $ 9.30 $ 1.50
8 $ 3.00 $ 8.00 $ 11.00 $ 1.70
9 $ 3.00 $ 9.90 $ 12.90 $ 1.90
10 $ 3.00 $ 12.0 $ 15.00 $ 2.10
 Revenue

Revenue is the money

payment received from the sell 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
ΔQ
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
Graphical presentation of TR, AR,
MR under Imperfect Competition
TR TR is maximum

TR

O Q
AR/MR

MR=0
O
MR AR Q
 Optimal production
Optimal production (in terms of
maximizing profits) occurs when the
marginal cost of an additional input is
exactly equal to the marginal revenue
received in response.
 'Economies Of Scale‘
Economies of scale is the cost advantage that arises with
increased output of a product. Economies of scale arise
because of the inverse relationship between the quantity
produced and per-unit fixed costs.

Economies of scale can be classified into two main

types: Internal – arising from within the company;
and External – arising from extraneous factors such as
industry size.