7b5f53 analysis of cost and revenue 25-04
TRANSCRIPT
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
1/21
Analysis of Cost andRevenue
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
2/21
Short runA period of time so short that the firm cannot
alter the quantity of some of its inputs
Typically plant and equipment are fixedinputs in the short run
Fixed inputs determine the scale of thefirms operation
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
3/21
SHORT-RUN COSTS
Fixed costs and variable costs
Total costs Short run fixed cost (SFC)
Short run variable cost (SVC)
Short run total cost (STC = SFC + SVC)
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
4/21
Costs In buying factor inputs, the firm
will incur costs
Costs are classified as:
Fixed costs costs that are not relateddirectly to production rent, rates,insurance costs, admin costs. They canchange but not in relation to output
Variable Costs costs directly relatedto variations in output. Raw materialsprimarily
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
5/21
Costs Total Cost -the sum of all costs incurred
in production
TC = FC + VC Average Cost the cost per unit
of output
AC = TC/Output Marginal Cost the cost of one more or
one fewer units of production
MC= TC n
TCn-1 units
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
6/21
Output Fixedcost
SFC
Variablecost
SVC
Total cost
STC
Marginalcost
SMC
Averagecost
SAC
0 30 0 30
1 30 22 52 22 52
2 30 38 68 16 34
3 30 48 78 10 26
4 30 61 91 13 22.75
5 30 79 109 18 21.80
6 30 102 132 23 22
7 30 131 161 29 23
8 30 166 196 35 24.50
9 30 207 237 41 26.33
10 30 255 285 48 28.50
Example
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
7/21
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
STC
TVC
SFC
Total costs for firm X
SVC
f f
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
8/21
0
20
40
60
80
100
STC
TVC
SFC
Total costs for firm X
Diminishing marginalreturns set in here
SVC
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
9/21
Output (Q)
Costs(
)
SAFC
SAVC
SMC
x
SAC
z
y
Average and marginal costs
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
10/21
Marginal and Average CostsAs Q increases if
MCAC AC is rising
So, when MC=AC AC is at its
minimum The above also applies to MC and
AVC
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
11/21
Long-run Cost Curves Long-run cost curves all factors are variable, so
there are no fixed costs and all costs are variable. Economies and diseconomies of scale
benefits to a larger scale of operations
specialization, purchasingvolume, efficient use of capital, design and development costs
costs of a larger scale of operation coordination problems
LR cost curves are U-shaped if a productionprocess is characterized by first by economies ofscale, and then diseconomies of scale.
Since capital can be varied, the long-run costcurves describe the costs with changing the scaleof operations (reducing or increasing plant size).
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
12/21
The long-run cost curve is constructed from
various short-run cost curves.
Remember increasing capital makes labor moreproductive, so increase plant size makes labormore productive and decreases marginal costs
Even though marginal costs decline, average
costs may go up or down because of the cost ofcapital and labor are added together to calculateaverage costs.
Fi 7 A T t l C t i th Sh t d L
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
13/21
Figure 7 Average Total Cost in the Short and LongRun
Copyright 2004 South-Western
Quantity ofCars per Day
0
AverageTotalCost
1,200
$12,000
ATC in shortrun with
small factoryATC in short
run withmedium factory
ATC in shortrun with
large factory
ATC in long run
Fi 7 A T t l C t i th Sh t d L
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
14/21
Figure 7 Average Total Cost in the Short and LongRun
Copyright 2004 South-Western
Quantity ofCars per Day
0
AverageTotalCost
1,200
$12,000
1,000
10,000Economies
ofscale
ATC in shortrun with
small factoryATC in short
run withmedium factory
ATC in shortrun with
large factory ATC in long run
Diseconomiesof
scale
Constantreturns to
scale
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
15/21
OutputO
Co
sts
Long-run average and marginal costs
LRMC
LRAC
Initial economies of scale,then diseconomies of scale
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
16/21
Short-Run & Long-Run Marginal Cost Curves
AC(y)
MC(y)$/output unit
y
SRMCs
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
17/21
Revenue
Total revenue the total amount receivedfrom selling a given output
TR = P x QAverage Revenue the average amount
received from selling each unit
AR = TR / Q
Marginal revenue the amount receivedfrom selling one extra unitof output
MR = TRn TRn-1 units
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
18/21
Profit
Profit = TR TC
The reward for enterprise Profits help in the process of directing
resources to alternative uses in free
markets Relating price to costs helps a firm to
assess profitability in production
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
19/21
Profit
Normal Profit the minimum amount required tokeep a firm in its current line of production
Abnormal or Supernormal profit
profit madeover and above normal profit
Abnormal profit may exist in situations wherefirms have market power
Abnormal profits may indicate the existence ofwelfare losses
Could be taxed away without altering resourceallocation
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
20/21
Profit
Sub-normal Profit profit belownormal profit
Firms may not exit the market even if sub-
normal profits made if they are able to
cover variable costs
Cost of exit may be high
Sub-normal profit may be temporary (or
perceived as such!)
-
7/30/2019 7b5f53 Analysis of Cost and Revenue 25-04
21/21
Profit
Assumption that firms aim to maximise
profit
May not always hold true
there are other objectives
Profit maximising output would bewhere MC = MR