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    Lesson 6 Theory of Cost and Profit: Cueto, Ivan Macayan, Jhon Alexis Bangcuyo, Andrei Nicole Betsaida, Angelika (Group 6)

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    The document discusses the concepts of explicit costs, implicit costs, and opportunity costs that make up the total costs of production for a firm. It also explains the differences between accounting profits, economic profits, and normal profits. Finally, it covers cost concepts such as fixed costs, variable costs, average costs, and marginal costs.

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    Lesson 6 Theory of Cost and Profit: Cueto, Ivan Macayan, Jhon Alexis Bangcuyo, Andrei Nicole Betsaida, Angelika (Group 6)

    Uploaded by

    Ally 19
    69 views38 pages
    The document discusses the concepts of explicit costs, implicit costs, and opportunity costs that make up the total costs of production for a firm. It also explains the differences between accounting profits, economic profits, and normal profits. Finally, it covers cost concepts such as fixed costs, variable costs, average costs, and marginal costs.

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    THEORY-OF-COST-AND-PROFIT

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    The document discusses the concepts of explicit costs, implicit costs, and opportunity costs that make up the total costs of production for a firm. It also explains the differences between accounting profits, economic profits, and normal profits. Finally, it covers cost concepts such as fixed costs, variable costs, average costs, and marginal costs.

    Copyright:

    © All Rights Reserved
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    Download as pptx, pdf, or txt
    69 views38 pages

    Lesson 6 Theory of Cost and Profit: Cueto, Ivan Macayan, Jhon Alexis Bangcuyo, Andrei Nicole Betsaida, Angelika (Group 6)

    Uploaded by

    Ally 19
    The document discusses the concepts of explicit costs, implicit costs, and opportunity costs that make up the total costs of production for a firm. It also explains the differences between accounting profits, economic profits, and normal profits. Finally, it covers cost concepts such as fixed costs, variable costs, average costs, and marginal costs.

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    Lesson 6

    THEORY OF COST AND


    PROFIT
    Cueto, Ivan
    Macayan, Jhon Alexis
    Bangcuyo, Andrei Nicole
    Betsaida, Angelika
    (Group 6)
    EXPLICIT AND IMPLICIT COSTS

    EXPLICIT IMPLICIT OPPORTUNITY


    COSTS COSTS COST
    EXPLICIT AND IMPLICIT COSTS

    Comprise all explicit


    payment to the
    factors of production
    EXPLICIT the firm uses
    COSTS
    EXPLICIT AND IMPLICIT COSTS
    Consist of the opportunity
    costs of using the firms own
    resources without receiving
    any explicit compensation for
    those resources

    IMPLICIT  NOT REGARDED as costs in


    an accounting sense, BUT
    COSTS they are a part of the firm’s
    costs of doing business
    EXPLICIT AND IMPLICIT COSTS
    The value of the next best
    alternative that is forgone when
    another alternative is chosen

    The opportunity cost of a


    OPPORTUNITY particular alternative is the payoff
    COST associated with the best of the
    alternatives that are not
    chosen.
    EXAMPLE:

    What is the cost to an airline of using


    one of its planes in scheduled
    passenger service?
    EXAMPLE:
     An airline’s expenditures on fuel
    and salaries are explicit costs;

     Whereas the income it forgoes


    by not leasing its jets is an
    implicit cost;
    EXAMPLE:
     Therefore, the sum total of the
    explicit costs and the implicit costs
    represents what the airline
    sacrifices when it makes the
    decision to fly one of its planes on
    a particular route which is the
    opportunity cost.
    FIXED AND VARIABLE COSTS
    FIXED AND VARIABLE COSTS
     In the short – run, some of the input factors
    the firm uses in production are fixed
     The cost of these fixed factors are the firm’s
    fixed costs
     The firm’s fixed costs DO NOT vary with
    increases in the firm’s output
    FIXED COSTS
    Cost incurred by the firm which DOES
    NOT vary with the volume of production.

    Whether you produce or not, you still


    incur that cost

    Firm also employs a number of variable


    factors of production

    The cost of these variable factors of


    production are the firm's variable costs
    FIXED COSTS

    In order to increase output, the firm must


    increase the number of variable factors of
    production that it employs.
    As firm output increases, the firm's
    variable costs must also increase.
    VARIABLE COSTS

    Cost incurred by the firm which varies


    with the volume of production.

    If you have your production, you will


    incur it, if you have zero production,
    your variable cost is equal to zero too.
    VARIABLE COSTS

    An example of this is the cost of your


    raw materials:

     As you produce more, more raw


    materials are needed; so, your
    variable costs will increase.
    VARIABLE COSTS

    The sum of your FIXED COST and VARIABLE


    COST is the TOTAL COST

    Total Cost = Fixed Cost + Variable Cost


     
    ACCOUNTING PROFITS,
    ECONOMIC PROFITS,
    AND NORMAL PROFITS
    ACCOUNTING PROFITS, ECONOMIC
    PROFITS, AND NORMAL PROFITS

    The difference between EXPLICIT and


    IMPLICIT COSTS is crucial to understanding the
    difference between ACCOUNTING PROFITS and
    ECONOMIC PROFITS. 
    ACCOUNTING
    PROFITS

    Accounting Profits are the


    firms total revenue from sales of
    it’s output, minus the firms
    explicit cost.
    ECONOMIC
    PROFITS

    Economic Profits are the


    total revenues minus
    explicit and implicit cost.
    NORMAL PROFITS

    A firm is said to make


    normal profits when it’s
    economic profit is zero.
    PROFIT, TOTAL REVENUE
    and TOTAL COST
    Total Revenue
    The amount of goods being sold or services
    being rendered multiplied by its price.

    Total Revenue = Price and Quantity


     
     EXAMPLE:
    A leather craftsman who sells
    boots for 100 pesos per pair.
    If he regularly sells 50 pairs
    per month, his total revenue
    is
    5,000 (100 x 50 = 5,000).
    Total Profit

    The firm’s main goal or objectives is to maximize profit.

    Total Profit = Total Revenue – Total Cost


    Francis wants to find out how much money they’ve made in their dog
    walking business. They need to know their total revenue and total
    expenses to calculate their profit.

    Total Revenue : 10,000


    Total Expenses : 1,500

    Francis’ total expenses are calculated by adding their direct and indirect costs,
    as follows:

    Direct costs, such as dog treats: 1,000


    Indirect costs, like posters and flyers: 500
    Total expenses: 1,000 of direct costs + 500 indirect costs = 1,500

    By subtracting 1,500 of total expenses from their total revenue of 10,000, Francis
    can calculate that their profit is equal to 8,500.
    CONCEPT OF REVENUE
    CONCEPT OF REVENUE
    Total Revenue is Price x Quantity

    TR = P x Q
    Average Revenue is Total Revenue/Output

    AR = TR/Q
    Marginal Revenue is Change in Total Revenue/Change in Output

    MR = Change in TR/Change in Q
    Total Cost
     The market value of the inputs a firm uses in production
    Firm’s cost of production
     Includes all the opportunity costs in making its output of
    goods and services as well as explicit costs and implicit costs
    Explicit costs
     Input costs that REQUIRE direct outlay of money by the firm
    Implicit costs
     Input costs that DO NOT REQUIRE outlay of money by the
    firm
    AVERAGE COSTS,
    MARGINAL COSTS
    Average total cost
    MOST OF THE TIME, economist deals with the average total cost.
    The total cost divide by total output

    ATC = TC/Q
    (also the same as ATC = AFC + AVC)

     It is important to determine because it depicts the cost incurred of 1 unit of


    product.

     It can be used as the basis for pricing.

     REMEMBER that your price must be greater than ATC.


    Average fixed cost

    Total fixed cost divide by output

    This depicts the fixed cost incurred of every unit of product

    Average Fixed Cost = Total Fixed Cost/Output

    AFC = TFC/Q
    Average variable cost

    Total variable cost divide by output

    Denotes the variable cost incurred of 1 unit of product

    Average Variable Cost = Total Variable Cost/Output

    AVC = TVC/Q
    Marginal Cost (MC)

    Measures the increase in total cost that arises from an extra


    unit of production

    The change in total cost divided by the change in output

    MC =
    Applying the formula, please see the following table.
    Q TC TFC TVC ATC AFC AVC MC

         
    0 - - - -
    Php3.00 Php3.00

    1 3.30 3.00 Php0.30 3.30 Php3.00 Php 0.30 Php 0.30

    2 3.80 3.00 0.80 1.9 1.50 0.40 0.50

    3 4.50 3.00 1.50 1.5 1.00 0.50 0.70

    4 5.40 3.00 2.40 1.35 0.75 0.60 0.90

    5 6.50 3.00 3.50 1.30 0.60 0.70 1.10

    6 7.80 3.00 4.80 1.30 0.50 0.80 1.30

    7 9.30 3.00 6.30 1.33 0.43 0.90 1.50

     
    8 3.00 8.00 1.38 0.38 1 1.70
    11.00

    9 12.90 3.00 9.90 1.43 0.33 1.1 1.90

    10 15.00 3.00 12.00 1.5 0.30 1.2 2.10

    Table 6.1
    Cost Table Incurred by Firm
    Table 6.1
    Cost Table Incurred by Firm

    • Cost also varies depending on the timeframe.


    • Timeframe
    – Short-run and long-run
    • There is no specific time in which we can say
    it is short run or long run.
    Table 6.1
    Cost Table Incurred by Firm

    Short-run
    - The timeframe which requires an immediate
    concern
    Long-run
    - Requires planning before you can make a
    decision
    *Between today and tomorrow, short run is today while
    tomorrow is the long-run.*
    Table 6.1
    Cost Table Incurred by Firm

    NOTE:

    These costs are incurred by the firm for short-run.


    In long-run, all cost become variable cost.

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