Economic Concepts Cost, Revenue and Profit The following terms are used in discussing the production and sale of a product. 1)The outputis to the number of units produced. 2)The cost of producing a commodity depends on many factors. a)Some costs are incurred no matter what the output. These are the fixedcosts.b)The variable costare those costs whic h vary wit h out put . For any given output, the average variable costis the variable cost divided by output. c)The total costis the sum of the fixed cost and variable cost. Total Cost = Fixed Cost + (Average Variable Cost) x Output 3)The total revenue from the sale of a good is the selling price multiplied by the number of units sold; this is the total income from sales. 4)Theprofitis the difference between revenue and cost, Profit = Revenue - Cost. 5)The break-even pointis the point where revenue equals cost, or equivalently profit = 0. Production is profitable only when revenue is greater than cost. 6)The average total cost, (or, briefly, average cost) is the total cost divided by output, . Example 1
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On the other hand, increased production might create a shortage of raw
materials and so drive up the production costs. In this case, the average variable
cost will increase. For example, if the average variable cost is while the
fixed costs are still $100 and the selling price $2.50 then
a) the cost function is ;
b) the revenue function is ;
c) the profit function is
d) the break even point is determined by solving the quadratic equation
This has no real solution, and there is no break even point. The graph below isinformative. Notice that at a selling price of $2.50, selling more and moreproducts leads to an increase in your loss.
price will fall. If the price is at equilibrium it will stay there unless other factors
enter to cause changes.
Example 8
Assume that the supply function is and the demand function is
. The breakeven point is found by setting equating the two functionsand then solving the resulting equation:
This gives the first coordinate; the second coordinate is (or,
using the demand equation, )
Example 9
We make the following assumptions about supply and demand.
• The supplier will produce 1000 units when the selling price is$20 per unit and will produce 1500 units if the price is $25 per unit.• Consumers will demand 1500 units when the selling price is$20 per unit but that the demand will decrease by 10% if the priceincreases by 5%.• Both supply and demand functions are linear.