Explain the concept of total cost and total revenue.
A) Cost Concepts:
When an entrepreneur undertakes an act of production, he has to use various inputs like raw material, labour, capital etc. He has to make payments for such inputs. The expenditure incurred on these inputs is known as the cost of production. Cost of production increases with an increase in the need for output. There are three types of costs which are as follows:
1) Total Cost (TC):
Total cost is the total expenditure incurred by a firm on the factors of production required for the production of goods and services. Total cost is the sum of total fixed cost and total variable cost at various levels of output.
TC = TFC + TVC
TC = Total cost
TFC = Total Fixed Cost
TVC = Total Variable Cost
- Total Fixed Cost (TFC):
Total fixed costs are those expenses of production which are incurred on fixed factors such as land, machinery etc.
- Total Variable Cost (TVC):
Total variable costs are those expenses of production which are incurred on variable factors such as labour, raw material, power, fuel etc.
2) Average Cost (AC):
Average cost refers to cost of production per unit. It is calculated by dividing total cost by total quantity of production.
AC = `"TC"/"TQ"`
AC = Average cost
TC = Total cost
TQ = Total quantity
3) Marginal cost (MC):
Marginal cost is the net addition made to total cost by producing one more unit of output.
MCn = TCn - TCn-1
n = Number of units produced
MCn = Marginal cost of the nth unit
TCn = Total cost of nth unit
TCn-1 = Total cost of previous units
B) Revenue Concepts:
The term ‘revenue’ refers to the receipts obtained by a firm from the sale of certain quantities of a commodity at given price in the market. The concept of revenue relates to total revenue, average revenue and marginal revenue.
1) Total Revenue (TR):
Total revenue is the total sales proceeds of a firm by selling a commodity at a given price. It is the total income of a firm. Total revenue is calculated as follows:
Total revenue = Price × Quantity
2) Average Revenue (AR):
Average revenue is the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold.
AR = `"TR"/"TQ"`
AR = Average Revenue
TR = Total Revenue
TQ =Total Quantity
3) Marginal Revenue:
Marginal revenue is the net addition made to total revenue by selling an extra unit of the commodity.
MRn = TRn - TRn-1
MRn = Marginal revenue of nth unit
TRn = Total revenue of nth unit
TRn-1 = Total Revenue of previous units
n = Number of units sold