Analysis Of Cost, Profit,

and Total Revenue

Cost is the most important consideration in production. A producer will not just jump into a particular investment my simply looking at the potential revenue of the business.

Accounting

VS. Economic Costs

The Fundamental concept that should be learned is the difference between economic cost and accounting cost. ECONOMIC COST – are forward looking costs, meaning, economists are in tune with future costs because these costs have major repercussions on the potential profitability of the firm.

Accounting Costs

– Tend to be retrospective; they recognize cost only when these are made and properly recorded. They do not adjust these costs even if opportunity cost change.

IMPLICIT VS.

EXPLICIT COSTS

Explicit Costs - Refers to the actual expenses of the firm in firm in purchasing or hiring the inputs in needs, such as. When a firm purchases a machine worth one million pesos or rents a building worth one hundred thousand pesos per month.

Implicit costs – refer to the value of inputs being owned by the firm and used in its own production process.

SHORT RUN- For a firm is a time horizon when one input is held constant. To analyze the short run costs, it is essential to fix the level of capital and study the changes in the quantity of labor hired.

Types of Short-run Costs:1. Total Fixed Costs (TFC) – These are that do not vary with

output.

2. Total Variable Costs( TVC) – These are costs that vary with output.

3. Total Costs (TC) – It is the sum of total fixed costs and total variable costs.

Formula: TC – TFC + TVC

4. Average Fixed Cost (AFC) – The total Fixed Costs divided by the number of output produced (Q).

Formula: AFC=TFC/Q

5. Average Variable Cost (AVC) – The total Variable costs divided by the number of output produced (Q).

Formula: AVC = TVC/ Q

6. 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.

Formula: ATC=TC/Q

7. 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.

Formula: MC= ∆ TC/ ∆Q

(1)Q

(2)TFC

(3)TVC

(4)TC

(5)AFC

(6)AVC

(7)ATC

(8)MC

0 30 O 30 - - - -

1 30 15 45 30 15 45 15

2 30 20 50 15 10 25 5

3 30 22.5 52.5 10 7.5 17.5 2.5

4 30 27.5 57.5 7.5 6.9 14.8 5

5 30 37.5 67.5 6 7.5 13.5 10

6 30 60 90 5 10 15 22.5

Hypothetical Costs Schedules

LONG-RUN COST

ANALYSISIs the time period wherein all

fixed factors can be variable. The long run average total cost of producing a given level of output is always the lowest points of the short run average total cost of producing the output.

LONG RUN MARGINAL

COSTThe Long run Marginal Cost measures the change in long run total cost from a given change in output.

BUSINESS PROFIT VS. ECONOMIC

PROFIT

BUSINESS PROFIT – The Difference between total revenue and explicit cost.

ECONOMIC PROFIT – Is the Difference between total revenue and both explicit and implicit cost.

THE PROFIT OF THE FIRM IN THE SHORT –RUN

A Competitive firm takes the market price as constant. If it wants to maximize profits, the optimum level of production in the short run is when its marginal cost is equal to its price .

THE END. THANK YOU FOR LISTENING =)))