Cost Analysis and

Revenue Analysis.
• In Economics, cost is sum total of:
• 1- Explicit cost
• 2- Implicit Cost
• Explicit cost the actual money expenditure on inputs
or payment made to outsiders for hiring their factor
services.
• Example, Wages paid to emplyee, Payment for raw
materials, etc.

• Implicit Cost is the estimated value of the inputs

supplied by the owners including normal profit .
• Example, intrest on own capital, rent of own land,
services of entrepreneur, etc.
• so cost in economics includes actual expenditure on
inputs (Explicit cost) and the imputed value of the
Short Run Costs
In the short run, there are some factors which are
fixed, while others are variable.
Similarly, short run costs are also divided into two
kinds of costs:
1- Fixed Cost
2- Variable Costs
The sum total of fixed cost and variable cost is
equal to total cost.
Total Fixed Cost Schedule

Output TFC
•0 • 12
•1 • 12
•2 • 12
•3 • 12
•4 • 12
•5 • 12
Total Variable Cost
• Output • TVC
•0 •0
•1 •6
•2 • 10
•3 • 15
•4 • 24
•5 • 35
Total Cost Schedule

Output. TFC TVC. TC

• 0. 12 • 0. 12+0= 12
• 1. 12 • 6. 12+6= 18
• 2. 12 • 10. 12+10= 22
• 3. 12 • 15. 12+15= 27
• 4. 12 • 24. 12+24= 36
• 5. 12 • 35. 12+35= 47
Average Costs
• The per unit costs explain the relationship between
cost and output in a more realistic manner.
• From total fixed cost(TFC) , Total variable cost (TVC)
and total cost (TC), we can obtain per unit costs.
• The 3 kinds of per unit costs are -:
• Average Fixed Cost
• Average Variable Cost
• Average total Cost
Marginal Cost
• Marginal cost refers to addition to total cost when
one more unit of a output (commodity) is
produced.
• For example, If TC of producing 2 unite is 200 and
TC of producing 3 units is 240, then MC = 240-200 =
40.
• MCn= TCn - TCn-1
• where n is number of units produced
• MCn is Marginal cost of the nth unit
• TCn = Total cost of n units
• TCn-1= Total cost of n-1 unit
• MC = Change in Total Cost / Change in units of
output.
• The marginal cost is the cost increase as a result of
making one more unit.The concept is often used in
production costing to decide whether production
should be increased or not.

• -- All things being equal, if the marginal cost is less

than the selling price of a product then it is worth
increasing production, as this will generate
additional contribution towards overheads. On the
other hand, if the marginal cost is greater than the
selling price of the product, then production should
not be increased.
Marginal Cost schedule
Revenue Analysis
Concept of Revenue
• Revenue refers to the amount received by a firm
from the sale of a given quantity of a
commodity in the market.
• Example-: If a firm gets 16000 rupees from sale
of 100 chairs, then the amount of rupees 16000
is known as revenue.
• Revenue is a very important concept in economic
analysis. It is directly influenced by sales level,i.e.,
as sales increase, revenue also increases.
• The concept of revenue consists of three
important terms: Total Revenue, Average
Revenue and Marginal Revenue.
• Total Revenue (TR)
• Total Revenue refers to total receipts from the
sale of a given quantity of a commodity.
• Total Revenue= Quantity ×Price
• Example: If a firm sells 10 chairs at a price of
rupees 160 per chair, then the total revenue
will be: 10 chairs × 160 =1600 rupees.
 Average Revenue
• Average Revenue refers to revenue per unit of
output sold.
• It is obtained by dividing the total revenue by
the number of units sold.
• Example: If total revenue from the sale of 10
chairs @160 per chair is 1600, Then:
• Average Revenue= Total Revenue\ Quantity
• 1600÷ 10 = 160 Rupees.
 AR and Price are the same

• AR is equal to per unit sale receipts and price is always

per unit. Since sellers receive revenue according to
price, price and AR are one and the same thing.
• This can be explained as under:
• TR = Quantity × Price ...........1
• AR = TR ÷ Quantity..................2
• putting the value of TR from equation 1 and 2, we get
AR =( Quantity × price) ÷ Quantity
• AR = Price
•
AR Curve and Demand Curve are
the same
• A buyer's demand curve graphically represents
the quantities demanded by a buyer at various
prices. In other words, It shows the various
levels of a average revenue at which different
quantities og good are sold by the seller.
• Therefore, in economics, It is a Average
Revenue curve as the Demand curve of a firm.
Marginal Revenue (MR)
• Marginal revenue is the additional revenue
generated from the salebof an additional unit of
output.
• It is the Change in TR from sale of one more unit of
a commodity.
• MRn = TRn - TRn- 1
• where MRn is marginal revenue of nth unit
• TRn is total revenue from n-1 units
• n is number of units sold
• Example, If the total revenue realised from sale of
10 chairs is rupees 1600 and that from sale of 11
chairs is 1780 rupees, then MR of the 11th chair
will be
• MR11 = TR11 - TR10
• MR11 = 1780 - 1600 = 180
• one more way to calculate MR
• We know, MR is the change in TR when one more
unit is sold. However, when change in units sold is
more than one, then MR can also be calculated as:
• MR = Change in Total Revenue ÷
Change in Number of units
Marginal Revenue Schedule
Marginal Revenue Curve
Marginal Revenue When Price
Remains Constant