Cost and Revenue Analysis


“The big hurdle is going out and raising the revenue ”
–Tyler Cowen


Cost and revenue analysis refers to examining the cost of production and sales revenue of a production unit or firm under various conditions. The objective of a firm is to earn profit, and not to make loss. However, a firm’s profit or loss is primarily determined by its costs and revenue. In simple terms, profit / loss is
defined as the difference between the total revenue and the total cost i.e., Profit (or) Loss = Total Revenue – Total Cost. As costs and revenue are very important to decide the production behaviour of a firm and its supply behaviour in the market, it is
necessary to understand the cost and
revenue concepts .

Cost Analysis:
Cost refers to the total expenses incurred in the production of a commodity. Cost analysis refers to the study of behaviour of cost in relation to one or more production criteria, namely size of output, scale of
production, prices of factors and other economic variables. The functional relationship between cost and output is expressed as ‘Cost Function’.

A Cost Function may be written as
C = f (Q)
Eg. TC = Q3 –18Q2 + 91Q + 12
where, C=Cost and Q=Quantity of output.Cost functions are derived functions because they are derived from Production Functions.We shall discuss the basic cost concepts and
their behaviour below.

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