Cost and Revenue Theory

Note: The original VNote structure and wording are preserved. Only clear errors or changed definitions are corrected minimally.

1. Explicit Costs and Implicit Costs

1.1. Explicit Costs

• Expenditures actually incurred during production are explicit costs.
• Also called accounting costs.

1.2. Implicit Costs

• Losses perceived by the operator during production are implicit costs.
• Also called opportunity costs.

1.3. Economic Cost

• Economic cost = accounting cost + opportunity cost.
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2. Short-Run Costs

2.1. Cost Function

• Reflects the relationship between cost and output.
• 
  • This cost is the minimum cost and output is the maximum output.
• Short-run total cost = short-run fixed cost + short-run variable cost = spending on fixed factors + spending on variable factors.
  • STC = TFC + TVC

2.2. Analysis

• Table method
  • TFC: total fixed cost
  • TVC: total variable cost
  • TC: total cost
  • AFC: average fixed cost
  • AVC: average variable cost
  • AC: average cost
  • MC: marginal cost

2.2.1. Total Cost

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2.2.2. Average Cost

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2.2.3. Marginal Cost Analysis

• Marginal cost first decreases and then increases.
  • Formula: MC = change in total cost / change in output.
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3. Long-Run Costs

3.1. Long-Run Total Cost Analysis

• LTC and STC have similar curve shapes.
• Scale and cost
  • 
  • Each point on the long-run cost curve is the minimum cost among different scales.
  • All short-run cost curves lie above this long-run cost curve.

3.2. Long-Run Average Cost

• Both LAC and SAC are U-shaped.
• 
  • Long-run average cost is the envelope of short-run average cost curves.
  • Long-run cost is the minimum of short-run costs.
• Economies of scale means long-run average cost falls as output expands; it is related to, but not the same concept as, returns to scale.
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3.3. Long-Run Marginal Cost

• LMC is also U-shaped and passes through the minimum point of LAC.
• At the output level determined by SAC and LAC, SMC = LMC.
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4. Revenue and Profit

• Total revenue = price * output.
• Average revenue = total revenue / output = price.
• Marginal revenue = change in total revenue / change in output.
• 
  • The sum of marginal revenues equals total revenue.