COURCE:
PRINCIPLES OF MACROECONOMICS AND MICROECONOMICS
COURCE PAPER:
COSTS AND REVENUE CALCULATIONS RELEVANT TO A FIRM
CONTENTS:
1. Introduction
2. Determining Profit Maximizing level of output from a table
3. Determining Profit Maximizing level of output from a graph
Conclusion
References
COSTS AND REVENUE CALCULATIONS RELEVANT TO A FIRM
Introduction:
Costing is an important aspect of production because:
1. By knowing how much it costs to produce an item or to carry out an activity it is possible to price the item or activity
2. It becomes possible to see how much of the total cost of an organisation, production line, or process can be attributed to particular items or activities
3. It makes it possible to identify costs that are too high and can be cut out
4. It is possible to make comparisons between the costs of different activities.
1. THE COSTS OF PRODUCTION
The cost-of-production theory of value is the theory that the price of an object is determined by the sum of the cost of the resources that went into making it. The cost can compose any of the factors of production (including labor, capital, or land) and taxation.
Costs are defined as those expenses faced by a business in the process of supplying goods and services to consumers. In the short run (where there are fixed and variable factors of production) we make a distinction between fixed and variable costs. Examples of each are given below.
Short run costs of production
TOTAL COSTS (TC) = TOTAL FIXED COST (TFC) + TOTAL VARIABLE COSTS (TVC)
Fixed costs
Fixed costs relate to the fixed factors of production and do not vary directly with the level of output. (I.e. they are exogenous of the level of production in the short run).
Total fixed costs (TFC) remain constant as output increases.
Average fixed cost (AFC) = Total Fixed Costs (TFC) / Output (Q)
Average fixed costs will fall continuously with output because the...