This document discusses different types of costs including fixed costs, variable costs, average costs, and marginal costs. It also discusses accounting profit versus economic profit. An example is provided about a bookshop manager who must determine the optimal order quantity and price under different scenarios considering sales revenue, costs, and profit maximization. The manager faces changing demand curves and options to return unsold books for a refund.

1. Chapter No# 6
Presented By:
Ibrar Butt

2. Cost:
Expenses occurred for manufacturing a product.
Cost = f(Q)
Types of Costs:
i. Fixed Cost
ii. Variable Cost
iii. Sunk Cost (which is done only once in the start )
iv. Opportunity Cost (occurs while deciding any alternative)
v. Average Fixed Cost (F.C/Q it is a per unit cost)
vi. Average Variable Cost (V.C/Q)
vii. Average Total Cost (T.C/Q)
viii. Marginal Cost (derivative of T.C)
ix. Explicit Cost (direct payments like wages, rent etc)
x. Implicit Cost (implied cost/production cost)
xi. Short run Cost (occurred for short time)
xii. Long run Cost (occurred For long time)

3. Profit
Accounting Profit
A/c profit=R-C
Economics Profit
Ecco profit=R-C(all types of costs)

4. Problem No # 1
A Manager of a book shop believes that she can predict potential
sales. Suppose the seller estimated price equation as P = 24-Q where
P is the price and Q is the quantity in hundreds of copies sold per
month. He buys directly from the publisher at $12 each copy. Lets
consider following three questions:
1) How many copies should he order and what price should he charge?
2) Suppose shelf space limited and stocking the best seller will take
shelf space away from other books and the manager estimates that
there is $4 profit on sale of a stocked book. Now what will be the
optimum price and order quantity?
3) After receiving the order the manager is disappointed to find that the
sales the best seller are considerably lower than predicted. Actual
demand is P = 18-2Q . The manager is now considering to return
some or all of the copies to the publisher who is obliged to refund $6
on each book retuned. How many should be sold and at what price?
Profit Maximizing with limited Capacity:
Earning
profit with limited capacity to stock the goods.
Now we will discuss about:

5. For the 1st Case: How many copies should be ordered and
which price should she charge?
P = 24-Q
Cost per copy(M.C) = $12
M.R = 24-2Q
by applying:
MR = MC
24-2Q = 12
24-12 = 2Q
Q = 6 (hundreds)
Quantity
Ordered
Price Sale revenue Cost Forgone
Profit
Final Net
Profit
600 $18 (600*18)10800 (12*600) 7200 - $3600
where,
P = 24-Q
So by applying Q = 6
P = 24-6
P = $18
(a)

6. Quantity
Ordered
Price Sale revenue Cost Forgone
Profit
Final Net
Profit
600 $18 (600*18)10800 (12*600) 7200 - $3600
400 $20 (400*20) 8000 (12*400) 4800 (4*400) 1600 $1600
(a)
(b)
For the 2nd Case: If he had to replace the books with new but profit
on sale of each book stocked is $4 then what will be the price and
order quantity ?
P = 24-Q
M.R = 24-2Q
M.C = Marginal Most + Opportunity Cost
M.C = 12+4
M.C = 16
By applying
M.R = M.C
24-2Q=16
24-16=2Q
4 (hundreds) = Q
If he replace only 400 books
As P = 24-Q
by applying Q = 4
P = 24-4
P = $20

7. Quantity
Ordered
Price Sale revenue Cost Forgone
Profit
Final Net
Profit
600 $18 (600*18)10800 (12*600) 7200 - $3600
400 $20 (400*20) 8000 (12*400) 4800 (4*400) 1600 $1600
[600] $18 10800 7200 (4*600) 2400 $1200
(a)
(b)
For the 2nd Case: If the shopkeeper replace all the books,
then?
P = 24-Q
M.R = 24-2Q
M.C = 12
By applying
M.R = M.C
24-2Q=12
24-12=2Q
6 (hundreds) = Q
As P = 24-Q
by applying Q = 6
P = 24-6
P = $18

8. Quantity
Ordered
Price Sale revenue Cost Forgone
Profit
Final Net
Profit
Qs = 600 $18 (600*18)10800 (12*600) 7200 - $3600
Qs = 400 $20 (400*20) 8000 (12*400) 4800 (4*400) 1600 $1600
[Qs = 600] $18 10800 7200 (4*600) 2400 $1200
Qs = 200 $14 (200*14)2800 (12*400) 4800 (4*200) 800 -$1600
Qr = 200 $6 (200*6) 1200 - 0 -
(a)
(b)
For the 3rd Case: If profit on sale of 400 books(P=12) is disappointing
and publisher offers to refund 6 dollar on return, what should he do?
(Now Either he should sale all the books or to return)
P = 18-2Q
M.R = 18-4Q
M.C =Marginal Cost + Opportunity cost
M.C= 6+4
M.C = 10
By applying
M.R = M.C
18-2Q=10
18-10=4Q
2 (hundreds) = Q
As P = 18-2Q
by applying Q = 2
P = 18-2(2)
P = $14
(c)
He should sale 200 books at price of 14 each
And return him the rest 200 books to
Refund 1200 dollars.

9. Competitive Advantage While International Trade:
When purchasing goods from foreign countries.
Problem No# 2
 Two countries Japan and united states show the productivity of
labor for good. For instance average U.S workers produce 4
bottles of pills and 1 watch per labor hour while JAPANESE
counterparts produce 2 bottles and .8 watches per labor hour.
 Suppose the U.S wage in both sectors is $15 per hour, whereas the
JAPANESE wage in both sectors is 1,000 yen(¥) per hour. Now
consider the labor cost per unit of each good in each country’s
currency.
Which country would have comparative advantage and
in which department?

10. Countries Pharmaceuticals Digital watches
U.S(labor) 4 per hour 1per hour
JAPAN(labor) 2 per hour .8 per hour
Productivity:
Costs:
Countries Pharmaceuticals Digital watches
U.S $15/4 = $3.75/bottle $15/watch
JAPAN $5/bottle
(1000/2=¥500)
$12.50/watch
(¥1000/.8=¥1250)
As 1$ = 100¥

11. THANKS…!