THEORY OF COST AND PROFIT

• COST - It is an amount that has to be paid or spent to buy or obtain something
• EXPENSES - It is a cost that is "paid" or "remitted", usually in exchange for something of value
• TOTAL FIXED COST - It is that cost which does not change with a change in the level of output. is constant at all levels of output
• TOTAL VARIABLE COST - It is that cost which changes as the level of output changes. is zero at zero level of output and with increase in output, it also increases
• LONG RUN COST - All costs are variable. These are accumulated when firms change production levels over time in response to expected economic profits or losses
• PROFIT MAXIMIZATION - Short run or long run process. Sales level where profits are highest.  Best output and price levels in order to maximize its return
• What is the formula of Total revenue?

  TR = PRICE X QUANTITY
• What is the formula of Total cost?


  TC=TFC + TVC
• What is the formula for Marginal revenue?

  MR= CHANGE TR/CHANGE Q
• What is the formula for Average revenue?

  AR=TR/Q
• What are the two main profit maximization methods that are used?

  MARGINALCOST-MARGINAL METHOD REVENUE AND TOTAL COST-TOTAL REVENUE METHOD
• An increase in sales quantity (∆Q) changes revenue in two ways, these are?

  OUTPUT EXPANSION EFFECT and PRICE REDUCTION EFFECT
• If price is below AVC then the firm should shut down and produce 0
• If the price is equal to AVC, the firm should produce
• If the price is above AVC but lower than ATC, the firm is at loss minimization
• If the price is equal to ATC, the firm is at break-even point
• If price is above ATC, the firm is at profit maximization