Cost and Revenue
Cost and revenue are fundamental concepts in business and economics. Cost refers to the expenses incurred in producing goods or services, while revenue is the income generated from selling those goods or services. Understanding the relationship between cost and revenue is crucial for businesses to make informed decisions about pricing, production, and profitability.
5 Key excerpts on "Cost and Revenue"
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells or provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this chapter is the cost side of the profit equation for companies competing in market economies under perfect competition. The next chapter examines the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. Among the questions this chapter will address are the following: How should profit be defined from the perspective of suppliers of capital to the firm? What is meant by factors of production? How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices and costs) play in optimization? This chapter is organized as follows: Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their uses and definitions. Section 3 covers the revenue and cost inputs of the profit equation and the related topics of breakeven analysis, shutdown point of operation, market entry and exit, cost structures, and scale effects. In addition, the economic outcomes related to a firm’s optimal supply behavior over the short run and the long run are presented in this section. A summary and practice problems conclude the chapter. 2. OBJECTIVES OF THE FIRM This chapter assumes that the objective of the firm is to maximize profit over the period ahead...
eBook - ePub- Tom Craig, David Campbell(Authors)
- 2012(Publication Date)
- Routledge(Publisher)
...Such costs may typically include the cost of the materials in the product, the costs of labour, rent on premises, transport costs, marketing or advertising costs, packaging costs, etc. In this respect, the price charged ensures that the seller does not make a trading loss. It is a means of gaining wealth and of making a profit if the price charged includes a net surplus over all costs incurred. Profits are used to reinvest in the business (e.g. buying more equipment) and to pay the owners of the business a return, such as the giving of dividends on shares. Profit We use the term ‘profit’ in a number of ways in ordinary conversation. In economic terms, the profit is the surplus a business is left with once a price has been achieved in a business transaction and all the costs have been paid. It can represent the cash surplus on one business transaction, in which case we express it as: profit = price – total cost or π = P – TC. It can also represent the total surplus made by a business over a period of time. This would be expressed as: profit = total revenue – total cost or π = TR – TC. for the time period in question. The price can sometimes be a signal to the buyer. A buyer often makes the assumption that ‘you get what you pay for’. In this regard, a low price will communicate certain features of the product to the buyer (e.g. cheap and cheerful, functional, basic, etc.) whereas a high price will have the opposite effect (e.g. quality, premium, luxurious, etc.). Revenue The term revenue is sometimes referred to as sales value, turnover, or income. It is the total sales for a business over a period of time and is expressed as: total revenue = price × quantity sold or TR = P × Q. Hence, if the price of a good is £2 and, over the course of a month, the business sells 1000 units, then its revenue for the month is £2 × 1000 = £2000...
eBook - ePub- Rob Dransfield(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...You are shown how to measure and illustrate different types of costs and revenues and methods that can be used to identify break-even, loss making and profit making positions for a business. 4.2 The nature of cost–volume–profit analysis A business model All businesses will receive revenues from selling products. They will incur costs in making and providing these products. The relationship between costs and revenues can be illustrated by taking the example of the giant multinational company BIC. BIC is a company that is able to benefit from what economists refer to as economies of scale. Economies of scale are the cost savings per unit of production that a large firm is able to achieve from producing on a very large scale. For example, BIC is able to spread its marketing costs across billions of units of product that are sold across the globe. Key Term Business model – a description of the operations of a business, including its plans to increase revenues and control costs. For example, BIC is an international business that focuses on producing biros, razors and cigarette lighters among other products. Its core lines are functional in meeting customer needs for standard useful items at value for money prices. BIC’s business model includes maximizing revenues by providing useful goods at attractive prices, and in controlling its costs through efficient operations including exploitation of economies of scale. These economies of scale include mass production and distribution. The relationship between revenues and costs determines the profit that a business makes. Key Term Revenue – the receipt from selling a good or service. There are a number of different ways of measuring revenue which are explored later in this chapter. In the context of this chapter cost will be defined as the money outlay to produce, and/or sell a good...
eBook - ePubProduction and Cost Functions
Specification, Measurement and Applications
- Erkin Bairam, Erkin Bairam(Authors)
- 2018(Publication Date)
- Routledge(Publisher)
...Product A realizing a profit of $10 in one day is better, other things equal, than product B realizing a profit of $10 in two days. Consequently an operationalization of the concept of profit or income has to encompass the dimension of time as well as cost for it to be useful in decision and policy contexts. This explains the difference in form between expressions (4) and (8). The accountant is required to compute an earnings figure for an accounting period despite the fact that many activities straddle the beginning and end of the period. Consequently it is necessary to estimate the activity cost per accounting period (i.e. per unit of time) which explains the appearance of the depreciation calculation in (8) in the place of a convolution term for a consumed input. Economists are aware that cost functions have to be estimated on the basis of sample data in most instances. The convolution terms in (8) are random variables and sample data could be used to estimate their average values along with other parameters of the underlying processes. However the essentially statistical nature of accounting earnings as an estimator of the long term average cost function of the firm and the part played by the depreciation calculation and other accounting allocations does not appear to be well understood at the theoretical level by either accountants or economists. The characteristics of the profitability and cost per unit of time of an activity, a collection of activities or a firm can only be known with certainty and measured directly when the activity is completed or the firm liquidated. One way of interpreting the accounting earnings function, therefore is as a time dependent estimate of this ultimate, direct measure. A two period, one product firm, for example, might buy a machine for $6 and expend a further $4 on input costs in period 1, selling one unit of output for $10 in period 1 and one for $12 in period 2, scrapping the machine at the end of the second period...
eBook - ePubMedia Economics
Applying Economics to New and Traditional Media
- Colin Hoskins, Stuart M. McFadyen, Adam Finn(Authors)
- 2004(Publication Date)
- SAGE Publications, Inc(Publisher)
...By bringing together the revenue with the cost side examined in the last chapter, we are able to explore the level of output and price that maximizes profits and the use of marginal analysis in determining these. Incremental analysis and discounting are introduced as managerial techniques firms can use to identify the most profitable option in real-world situations. We examine in detail how the economist measures profit, how this differs from the accountant’s concept of profit, and the implications for decision making by firms. Two managerial decision techniques, incremental analysis and net present value, are explored. The implications of risk for business decisions are considered. 6.1 Revenue We need to distinguish between total revenue, average revenue, and marginal revenue, and examine the relationship between these revenue concepts. We will do this assuming that each unit of output sold is sold at the same price. Total revenue (TR) is equal to the quantity (Q) sold of a good or service multiplied by the price (P) at which it is sold: TR = Q × P Average revenue (AR) is the revenue per unit of output. It equals total revenue divided by quantity: AR = TR/Q But as TR = Q × P, substituting for TR in this equation gives AR = Q × P/Q = P. Hence AR is equal to price. This relationship implies that a firm’s demand curve is also its average revenue curve. The demand curve shows the quantity demanded at any given price. The average revenue curve shows the average revenue, equal to price, for any quantity demanded. Hence a firm’s demand curve often has an AR label attached to it as well as a D. Marginal revenue (MR) is the change in total revenue resulting from the output of one more unit of the good or service: MR = ΔTR/ΔQ where ΔTR is the change in total revenue and ΔQ is the (one unit) change in output. If the firm can sell the additional unit at an unchanged price, then the demand curve for the firm is horizontal, and marginal revenue equals price...
