This document discusses different types of costs that producers consider, including total, average, and marginal costs. It defines fixed costs as those that do not vary with output, and variable costs as those that do vary with output. Total costs are the sum of fixed and variable costs. The document provides examples of accounting costs, which are retrospective, versus economic costs, which consider future and opportunity costs. It also distinguishes between explicit costs, which are actual expenses, and implicit costs, which are the value of owned inputs. Finally, it outlines the components of short-run cost analysis, including formulas for average fixed cost, average variable cost, average total cost, and marginal cost.

1. Chapter 7
Analysis of Cost, Profit,
and Total Revenue

2. Cost is the most important
consideration in production.
A producer will not just jump into a
particular investment by simply
looking at the potential revenue of the
business. Revenue may be substancial
but the producer will think twice
because of the implication on the
pricing of the commodity

3. Consumers will not be enthusiastic
in patronizing the offered product
if price is quite high. Inefficiency in
the production process has a direct
impact on cost, because it takes
away the incentives being
rewarded by the market for pr
producers that are not wasteful.

4. The market forces the producers to
manage cost of production by finding
the least cost in expanding output..

5. ACCOUNTING VERSUS
ECONOMIC COSTS
• ECONOMIC COSTS- are forward-looking costs,
meaning, economists are in tune with future
costs because these costs have major
repercussions on the potential profitability of
the firm.
Economists are also giving emphasis on the so
called opportunity cost , or costs that are
incurred by not putting the resources to
optimum use.

6. ACCOUNTING VERSUS
ECONOMIC COSTS
• If opportunity cost is measurable, it should be
included in the decision-making process, even
though it is expensive to do so. But there are
some costs that should not be used in
decision-making such as sunk costs, because
these are costs that are irretrievable due to
the fact these are already incurred and do not
affect a firm’s decision.

7. ACCOUNTING VERSUS
ECONOMIC COSTS
• ACCOUNTING COSTS- tend to be
retrospective costs only when these are
made and properly recorded. They do
not adjust these costs even if
opportunity costs change. Therefore, the
difference between economic costs and
accounting costs is opportunity costs.

8. IMPLICIT VERSUS EXPLICIT COSTS
• EXPLICIT COSTS refers to the actual
expenses of the firm in purchasing or
hiring the inputs it needs, such as when a
firm purchases a machine worth one
million pesos or rents a building worth
one hundred thousand pesos per month.

9. IMPLICIT VERSUS EXPLICIT COSTS
• IMPLICIT COSTS refer to the value of inputs
being owned by the firm and used in its own
production process. Example, the owner of
the business is an Accountant; if he will work
for another company he could earn thirty
thousand pesos. However, he chose to e
accountant of his business. His thirty thousand
peso salary that he could earn for another
company is his implicit cost.

10. SHORT-RUN COST ANALYSIS
• Short-run for a firm is time horizon
when one input is held constant. To
analyze the short-run costs, it is
essential to fix the level of capital
and study the changes in the
quantity of labor hired.

11. The following are the types of short-
run costs:
1. Total fixed costs (TFC) = costs that do not vary
with output. Examples of these costs are
depreciation of building and machinery, salaries of
top management, rent expenses on leased plant
and interest payments on borrowed capital.
2. Total variable costs (TVC) = costs that vary with
output. Examples of these costs are payment for
raw materials, wages tax payments, operating
expenses ( light, fuel, and water).

12. 3. Total costs (TC) = the sum of total fixed costs and
total variable costs
Formula : TC = TFC + TVC
4. Average fixed costs ( AFC) = total fixed costs
divided by the number of output produced (Q)
Formula: AFC = TFC/Q
5. Average variable costs (AVC)= total variable
costs divided the number of output produced (Q)
Formula: AVC= TVC/Q

13. 6. Average total costs (ATC)= total costs divided
by the number of output produced (Q). Also
defined as the cost per unit of output.
Formula: ATC = ATC/Q
7. Marginal costs (MC) = changes in total
divided by the change in output produced (Q). It
is also the additional cost incurred from
producing additional unit of output.
Formula: MC = ΔTC/ ΔQ

14. Hypothetical Cost Schedule
(1)
Q
(2)
TFC
(3)
TVC
(4)
TC
(5)
AFC
(6)
AVC
(7)
ATC
13.4(8)
MC
0 30 0 30 ∞ ∞ ∞ ∞
1 30 15 45 30 15 45 15
2 30 20 50 15 10 25 5
3 30 22.5 52.5 10 7.5 17.5 2.5
4 30 27.5 57.5 7.5 6.9 14.38 5
5 30 37.5 67.5 6 7.5 13.5 10
6 30 60 90 5 10 15 22.5

16. AFC
AVC
ATC