Page 141 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes level is below this breakeven point that is If TR < TC, it incurs operating losses. If firm’s output
level is above this breakeven point that is if TR > TC it realises operating profits. Algebraically,
it can be defined as:

Total revenue is equal to the selling price per unit times the output level.
TR = P × Y
Total cost is equal to fixed cost plus variable cost, where the variable cost is the product of the
variable cost per unit times the output level.
TC = TFC + AVC × QY
Now break-even output level is that level where profit is zero.
TR = TC.

P × Y = TFC + AVC × Y
P × Y – AVC × Y = TFC
Y (P – AVC) = TFC

Y =

8.8 Summary

Costs enter into almost every business decision and it is important to use the right analysis
of cost. Different business problems call for different kinds of costs such as future and past
costs, incremental and sunk cost, out of pocket and book costs, replacement and historical
costa etc.
Fixed costs are those costs which do not very with the change in the level of output in the
short run. Variable costs change with output levels.
The short run is a period of time in which the output can be increased or decreased by
changing only the amount of variable factors such as labour, raw materials, chemicals, etc.
Long run, on the other hand, is defined as the period of time in which the quantities of all
factors may be varied.
There are short run average fixed cost and variable cost as well as long run average costs.

Total cost is the sum of total of the explicit plus implicit expenditure. Average cost is the
cost per unit of output. Marginal cost is the extra cost of producing one additional unit.
Economies of scope are reductions in average costs attributable to an increase in the
number of goods produced.

8.9 Keywords

Abandonment costs: Costs incurred for disposing of the fixed assets, when any plant is to be
permanently closed down.
Book costs: Costs that do not require current cash expenditure.
Direct costs: Costs which can be directly attributed to the production of a unit of a given product.

Explicit costs: Expenses which are actually paid by the firm (paid-out-costs).
Implicit costs: Theoretical costs which go unrecognized by the accounting system.

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