Cost

The term cost means different things to different people. For business executives cost figure is very important in determination of price.

Cost refers to the amount of expenditure incurred in obtaining the services of factors of production or we can say, the cost is the expense incurred in producing a commodity.

Types of Cost:

There are 4 types of cost, which are as follows: -

1. Real Cost – it includes the efforts and sacrifice of the factors or its real cost. It is beyond accurate measurement.
2. Money Cost – it refers to the total money expenditure incurred on various items which are used for production. It includes wages for labourers, price of raw material, fuel cost, rent of building, electricity bill, transportation bill etc.
3. Opportunity Cost – it is the cost of producing any commodity which is next best alternative good that is sacrificed.
4. Total Cost – actual cost that must be incurred in producing a given quantity. Total cost is equal to Total Fixed Cost and Total Variable Cost. TC = TFC + TVC

Revenue Concepts

Revenue refers to the receipts obtained by a firm from selling various quantities of its products.

There are 3 concepts of revenue:

1. Total Revenue –

Price paid by the consumer for products form revenue. In other words, we can say it is the income of the seller. The whole income received by the seller from selling various units of a commodity either at same or different prices is called Total Revenue.

TR = P x Q

Where,

TR = Total Revenue

P = Price

Q = Quantity Sold

For eg.: if a seller sells 100 units of a product at Rs. 15, then the total revenue will be Rs. 1500.

2. Average Revenue –

It is revenue per unit of the product sold. It is calculated by dividing TR by no. of units.

AR = TR / Q

For eg.: if a firm makes 100 T-Shirts and sells each for Rs. 10.

TR = P x Q = 10 x 100 = Rs. 1000

AR = TR / Q = 1000 / 100 = Rs. 10

3. Marginal Revenue –

It is the net revenue earned by selling on additional units of the product. In other words, we can say Marginal Revenue is the addition made to the Total Revenue by selling one or more units of the commodity.

MR = ΔTR / ΔQ

Where,

MR = Marginal Revenue

ΔTR = Change in Total Revenue

ΔQ = Change in Quantity

For eg.: A company sold the first 100 units of an item for a total of Rs. 1,000 in one week. The next week it sold 115 units for Rs. 1,100. The change in revenue from week one to week two is Rs. 100, and the change in quantity is 15 units.

MR = ΔTR / ΔQ

MR = 100 / 15

MR = Rs. 6.67 per unit

Relationship between Marginal Revenue and Average Revenue:

A general relationship between AR and MR is as follows:

1. Whenever AR is falling (sloping downwards), MR is always below AR (MR < AR)
2. If AR is constant, AR = MR (under perfect competition)

The marginal revenue (MR) and average revenue (AR) relationship explains how the revenues of a company change when additional units are sold.