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    Theory of Cost and Profit

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    Crystal De Guzman
    This document discusses economic costs and profit. It defines different types of costs including explicit costs, implicit costs, fixed costs, variable costs, total costs, average costs, marginal costs and opportunity costs. It also discusses the relationships between these different costs and how to calculate them. The document then discusses the concepts of total revenue, marginal revenue, profit, loss and break-even point. It provides examples of cost and revenue schedules and how to use them to determine profit/loss and the break-even point where total revenue equals total costs.

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    Theory of Cost and Profit

    Uploaded by

    Crystal De Guzman
    43 views20 pages
    This document discusses economic costs and profit. It defines different types of costs including explicit costs, implicit costs, fixed costs, variable costs, total costs, average costs, marginal costs and opportunity costs. It also discusses the relationships between these different costs and how to calculate them. The document then discusses the concepts of total revenue, marginal revenue, profit, loss and break-even point. It provides examples of cost and revenue schedules and how to use them to determine profit/loss and the break-even point where total revenue equals total costs.

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    6.-Theory-of-Cost-and-Profit

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    This document discusses economic costs and profit. It defines different types of costs including explicit costs, implicit costs, fixed costs, variable costs, total costs, average costs, marginal costs and opportunity costs. It also discusses the relationships between these different costs and how to calculate them. The document then discusses the concepts of total revenue, marginal revenue, profit, loss and break-even point. It provides examples of cost and revenue schedules and how to use them to determine profit/loss and the break-even point where total revenue equals total costs.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    43 views20 pages

    Theory of Cost and Profit

    Uploaded by

    Crystal De Guzman
    This document discusses economic costs and profit. It defines different types of costs including explicit costs, implicit costs, fixed costs, variable costs, total costs, average costs, marginal costs and opportunity costs. It also discusses the relationships between these different costs and how to calculate them. The document then discusses the concepts of total revenue, marginal revenue, profit, loss and break-even point. It provides examples of cost and revenue schedules and how to use them to determine profit/loss and the break-even point where total revenue equals total costs.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 20

    THEORY OF COST AND PROFIT

    Learning Objectives

    • Explain the relationship among the different


    economic costs.

    • Differentiate between economic profit and


    accounting profit.
    Types of Economic Costs
    • Explicit Cost – also called the expenditure cost.
    Payments to the owners of the factors of
    production like wage, interests, raw materials
    • Implicit Cost – a firm’s opportunity cost of
    using its own factors of production without a
    corresponding cash payment like rent for land.
    Types of Economic Costs
    Fixed Cost (FC) - does not change with an
    increase or decrease in the amount of
    goods or services produced.
    Variable Cost (VC)- expense that varies
    with production output. they rise as
    production increases and fall as production
    decreases.
    Total Cost (TC) = the market value of all the
    inputs used by the firm in production (FC + VC)
    Types of Economic Costs

    • Opportunity cost - The cost of an alternative that


    must be forgone in order to pursue a certain action.
    Types of Economic Costs
    • Average Cost (AC) – also called the unit
    cost
    AC = TC
    Q
    • Marginal Cost (MC) – extra cost for
    producing one additional unit of output
    MC = ∆TC
    ∆Q
    TOTAL COST DATA

    OUTPUT TFC TVC TC


    0 40 0 40
    2 40 70 110
    3 40 130 170
    4 40 184 224
    5 40 244 284
    6 40 310 350
    7 40 380 420
    8 40 460 500
    9 40 550 590
    10 40 650 690
    Total Cost Curves
    COST
    AVERAGE COST DATA, TOTAL AND MARGINAL COST

    OUTPUT AFC AVC ATC TC MC


    0 40 0 40 40 - 
    2 20 35.00 55 110 35
    3 13.33 43.33 56.67 170 50
    4 10.00 46.00 56 224 64
    5 8.00 48.80 56.8 284 60
    6 6.67 51.67 58.34 350 66
    7 5.71 54.29 60 420 70
    8 5.00 57.50 62.5 500 80
    9 4.44 61.11 65.56 590 90
    10 4.00 65.00 69.00 690 100
    Average Cost Curves
    COST
    REVENUE AND PROFIT
    Total Revenue and Marginal Revenue
    • Total Revenue (TR) - income received
    from the sale of goods and services.
    TR = Price X output
    Marginal Revenue (MR) = the change in
    the total revenue resulting from the sale
    of one unit of output.
    MR = ∆TR
    ∆Q
    Profit and Loss Data
    Profit/
    OUTPUT TC MC TR MR (Loss)
    1 40 -  60   20
    2 110 35 120 60 10
    3 170 60 180 60 10
    4 224 54 240 60 16
    5 284 60 300 60 16
    6 350 66 360 60 10
    7 430 80 420 60 -10
    8 500 70 480 60 -20
    9 590 90 540 60 -50
    10 690 100 600 60 -90
    Total Revenue vs Total Cost
    COST
    Break-even Point
    • The level of output at which total
    revenue equals total cost and can be
    determined using 3 approaches:
    1.Based on the total cost and total
    revenue schedule. Analyze the entries.
    The break-even point is when Total
    revenue = Total cost.
    Break-even Point

    2. Graphing - the point of intersection


    between the total cost and total revenue
    curves
    Total Revenue vs Total Cost
    COST
    Break-even Point
    3. Mathematical computation using the following
    basic equation:
    TR = TC
    P X Q = TFC + TVC
    Break-even volume:
    Q be = TFC+TVC
    P
    Break-even price :
    P be = TFC+TVC
    Q
    Exercise for Costs, Profit/(Loss) and Maximization
    PROFIT/
    OUTPUT TFC TVC TC MC TR MR (LOSS)
    0 0 35
    4 50
    6 65
    8 85
    10 100
    12 135
    14 175
    16 230
    18 300
    20 350

    a) Complete the cost and revenue schedule. Selling price is at P17.50/unit.


    b) Determine the breakeven point through graphical method. Identify the profit
    and loss areas. Label your graph properly.
    c) Determine the profit maximization point using the MC=MR rule.
    References
    Mankiw, G.N., (2012). Essentials of Economics 6th Edition. Harvard
    University: South-Western, Cengage Learning
    Mastrianna F.V.(2013).Basic Economics 16th Edition. South-
    Western Cengage Learning
    McConnel, C. et.al (2012). Economics: Principles, Problems, and
    Policies (Global Edition). McGraw Hill Co., Inc.
    Paraiso O.C. et.al (2011). Introduction to Microeconomics, Mutya
    Publishing House, Inc.
    Stock W.A., (2013) Introduction to Economics: Social Issues and
    Economic Thinking

    Interrn Sites:

    https://ph.images.search.yahoo.com
    http://www.intelligenteconomist.com/
    http://www.investopedia.com/

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