3.3 Costs and revenues

Average cost (AC)

• Cost per unit of output

• AC = TC ➗ Q

Average revenue (AR)

• Value of sales received from customers per unit of a good or service sold

• AR = TR ➗ Q = P

• Average revenue = price

Cost

• Sum of money incurred by a business in the production process.

• Raw materials, wages, salaries, and insurance.

Direct costs

Costs specifically attributed to the production or sale of a particular good or service.

Fixed costs

• Costs that do not vary with the level of output.

• Exist even if there is no ouput.

Indirect costs (overheads)

Costs that do not directy relate to the production or sale of a specific product.

Price

Amount of a money a product is solf for. It is the sum paid by the customer to purchase a good or service.

Profit

Exists if there is a positive difference between a firm’s total revenues and its total costs.

Revenue

• Money that a business earns from the sale of goods and services.

• Unit price of each product x quantity sold

Revenue stream

Money coming into a business from its various business activities.

Running costs

Ongoing costs of operating the business.

Set-up costs

Items of expenditure needed to start a business.

Total costs

Sum of all variable costs and all fixed costs of production.

Total revenue

Money coming into a business, usually from the sale of goods and/or services. It is calculated by multiplying the price of a product with the quantity sold.

Variable costs

Costs of priduction that change in proportion to the level of output, such as raw materials and hourly wages of production workers.