Cost Revenue Analysis
Cost Revenue Analysis
Cost Revenue Analysis
• Implicit Cost: Refer to the value of inputs being owned by the firm
and used in its own production process.
Business profit vs Economic Profit
• Business Profit: The difference between total revenue and explicit
cost.
• Total cost (TC) is the cost associated with all of the inputs.
• It is the sum of TVC and TFC.
• TC=TFC+TVC
• Average Fixed Cost (AFC) – The total Fixed Costs divided by the number
of output produced (Q).
• AFC=TFC/Q
• Average Variable Cost (AVC) – The total Variable costs divided by the
number of output produced (Q).
• AVC = TVC/ Q
• Average Total Cost (ATC) – The total cost divided by the number of
output produced (Q). It is also defined as the cost per unit of output.
• ATC=TC/Q
• Marginal Cost (MC) – To Changes in total cost divided by the
change in output produced (Q). It is also the additional cost incurred
from producing additional unit of output.
• MC= ∆ TC/ ∆Q
Q TFC TVC TC AFC AVC ATC MC
0 30 0 30 - - - -
1 30 15 45 30 15 45 15
2 30 20 50 15 10 25 5
6 30 60 90 5 10 15 22.5
Revenue
• Wealth-maximizing
• Each seller has sufficient market power to set the selling price higher
and sell less OR set the selling price lower and sell more.
• The demand curve facing the price searcher is downward sloping
Total Revenue
• Total revenue ( TR ) is the total amount of money(or some other good)
that a firm receives from the sale of its goods.
• It is the firm practices single pricing rather than price discrimination,
TR = total expenditure of the consumer = P x Q
Average Revenue
• Average revenue ( AR ) is the total amount of money (or some other good)
that a firm receives from the sale divided by the number of units of goods
sold.
• AR = TR/Q, since TR=P x Q, then AR = P for single pricing practice.
Marginal Revenue
• Marginal revenue ( MR ) is the change in total revenue resulting from
selling an extra unit of goods.
• MR = TR/Q,
• where TR = change in TR due to change in Q,
• Q = change in Q