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Cost and Revenue

Prepared and presented by

Nature of cost and cost curves
• cost
An amount that has to be paid
or spent to buy or produce
Production cost
• A cost incurred by a business when
manufacturing a good or producing a service.
Production costs combine raw material and
Real cost
• Definition
• The overall actual expense involved in
creating a good or service for sale to
Opportunity cost

It refers to next best alternative cost,

A benefit, profit, or value of something that
must be given up to acquire or achieve
something else.
Private cost & social cost
• Private Costs + External Costs = Social Costs
• Private costs for a producer of a good or,
service, include the costs the firm pays to
purchase capital equipment, hire labour, and
buy materials or other inputs.
• External cost- e.g. installing water pollution
control equipment
The cost function

• Definition
• A mathematical formula used to predict the
cost associated with a certain action or a
certain level of output.
• It is divided as short run cost and long run
cost curves
• 1 Short-run average variable cost curve
• 2 Short-run average total cost curve (SRATC
or SRAC)
• 3 Long-run average cost curve (LRAC)
• 4 Short-run marginal cost curve (SRMC)
• 5 Long-run marginal cost curve (LRMC)
Total cost

• Total cost = Variable cost+ Fixed cost

“ the sum of fixed costs, variable costs”.
variable cost

• Variable costs are costs that change in

proportion to the good or service that a
business produces
Fixed cost
• Fixed costs which are necessary to start a
business, e.g., Buildings,machinary etc.
• These are not dependent on the level of
goods or services produced by the business
Marginal cost

• It refers to additional cost for producing extra

one unit.
Average cost- It refers to total cost
divided by quantity
Total cost curve
Marginal cost curve
MC cuts at minimum point of AC
Short run cost curves
TC,TVC,TFC curves
Reserve capacity
• It refers to excess capacity, which a firm not
using under imperfect competition
Shape of different cost curves
Marginal cost & ATC,AVC
Revenue curve under perfect
Revenue curve imperfect competition
Revenue curve under oligopoly
Revenue curve under monopoly
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