COST, REVENUE and MARKET STRUCTURE

COST
Cost of production means the money spent by a business firm for the resources used to produce a product.
Rent must be paid for land, wages must be paid for labour, interest must be paid for capital and profit must be paid for organization.
All these expenses put together is the cost of production in terms of money in economics.
In other words, the cost of production is the money value of the factors of production made use of in the production of a commodity.

CLASSIFICATION OF COST OR TYPES OF COST

1. Money Cost or Nominal Cost:
Money cost, also called nominal cost and expenses cost, refers to payments for materials, wages and salaries for labour, power and
fuel, rent, insurance, transport charges, repairs of machines and equipments, taxes, etc.

2. Real Cost:
Real cost is the pain the owner takes in supplying the factors of production. The real cost cannot be measured in terms of money.
Again, in the real world, the earnings of people never correspond to the efforts and sacrifices undergone by them. So, the concept of
real cost of production is of little significance in calculating the price of a product.

3. Actual Cost:
Actual costs mean the actual expenses for purchasing or producing a product or service. These are the costs that are generally recorded
in the books of account. Actual cost of raw materials purchased, actual wages paid, interest paid, etc. are examples of actual costs.
Actual costs are also known as absolute costs or outlay costs.

4. Opportunity Cost:
Opportunity cost is the value of the next best foregone alternative product that the resources used in the production of a product could
have produced. So, the opportunity cost of anything is the value of the next best alternative that has been foregone. For instance, if a
piece of land is used for growing sugar-cane, it is not available for growing the next best alternative crop, say, paddy. So, the
opportunity cost of land used for sugar-cane cultivation is the value of paddy that could have been produced on that piece of land, but
foregone. So, the opportunity cost of anything can be defined as the revenue foregone by not making the next best alternative use.

In this context, it may be noted that there may be a case where a particular resource or factor of production has no alternative use. In
such a case, the opportunity cost of that particular resource or factor of production will be Zero. For example, if there is a land which
cannot be used for any other purpose other than for construction. Then the opportunity cost of that land, though used for construction,
is zero.
The concept of opportunity-cost is of much importance to management. It is useful to the management in making decisions among
alternatives. In many cases, the management has to consider the opportunity cost, and not the actual cost of a product, in making
decisions. The owner will choose the use of it only its his revenue is more than opportunity cost.

5. Explicit Costs:
Explicit costs refer to payments made by a firm for purchasing resources. They consist of payments made for raw materials, wages
and salaries of workers, etc. Alfred Marshall calls the explicit costs as expenses of production. Explicit costs involve cash payments to
others. Further, they are entered in the books of accounts.

6. Implicit Costs or Imputed Costs:

Implicit costs refer to the value of the firm's own efforts and sacrifices incurred on production. In other words, implied costs refer to
revenue which the firm would realize for the self-owned and self-employed resources. In short, the earnings of factors of production
belonging to the owners themselves are called implicit costs. They include salary of the entrepreneur, rent for firm's own land and
buildings, interest on firm's own capital, etc. Implicit costs do not involve cash payments to others. Further, they are not entered in the
books of accounts of the firm.
It may be noted that though implicit costs are not entered in the books of accounts, they cannot be ignored in taking business
decisions.

7. Fixed Costs: (also known as supplementary costs, indirect costs, overhead costs and general costs)
Fixed costs are costs which do not change with a change in the level of output. They are independent of output, i.e., they do not
depend on output. They remain even at zero output. As these costs do not change with changes in output, they are called fixed costs.
Example: Rent of buildings, insurance charges, salaries of permanent staff, interest on capital, etc. It may be noted that the total fixed
cost will not change with a change in output. In the long run, all costs, including fixed costs vary or change.

8. Variable Costs: (also known as prime costs, direct costs and special costs)
Variable costs are to costs which vary with the change with a change in output. If the firm produces more goods, the variable costs
increase. If the firm produces less goods, the variable costs decrease. If the firm does not produce goods, there will be no variable
costs. Thus, the variable costs depend on the output the firm produces. As these costs vary or change with a change in output, they are
called variable costs. Example: Costs of raw materials and semi-finished materials, wages paid to daily labourers, fuel and power
costs, transport charges, etc.
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9. Total Cost:
The cost of production of a product comprises two parts, viz., fixed costs and variable costs. So, the total cost of production of a
product is the sum total of fixed costs and variable costs. In short, total cost is equal to total fixed cost + total variable cost.

10. Average Fixed Cost:

If the total fixed cost of a product is divided by the number of units produced, we get average fixed cost. In other words, average fixed
cost is the fixed cost per unit of production. It may be noted that, as the total fixed cost will remain the same even though the
production increases, the average fixed cost decreases with every increase in output.

11. Average Variable Cost:

If the total variable cost of a product is divided by the number of units produced, we get the average variable cost. In other words,
average variable cost is the variable cost per unit of Total Variable Cost of production.

It may be noted that, as the production increases, in the first stage (i.e., in the increasing return stage), the total variable cost increases
at a diminishing rate. That means, if the production is doubled, the total variable costs will not double. So, at this stage, the average
variable cost may diminish. After a stage, the increasing returns disappear and constant returns occur. At this stage, the average
variable cost remains the same. After some time, the stage of diminishing returns appears. At this stage, the average variable cost
increases.

12. Average Cost:

If the total cost of a product is divided by the number of units produced, we get the average cost. In other words, average cost is the
cost per unit of production.
Average Cost = Total Cost ÷ Number of units
also
Average Cost = Average Variable Cost + Average Fixed cost

13. Marginal Cost:

Marginal Cost is the cost on the last unit of production. Marginal cost is the additional cost of producing one more unit. In other
words, it is the addition made to total cost by producing one more unit of a commodity.

Importance of the Concept of Marginal Cost:

'Marginal cost' is an important concept in economic analysis. The importance of the concept of marginal cost is as follows:

When a producer wants to increase one extra unit, he has to consider two things.
(i) How much has he to spend to produce the additional unit? = Marginal Cost
(ii) How much additional amount does he earn by selling the additional unit? = Marginal Revenue

In other words, he has to consider the marginal cost and marginal revenue.
• If the marginal cost is less than the marginal revenue, he produces the additional unit.
• If the marginal cost is greater than the marginal revenue, he will not produce the additional unit. He will stop the production
of additional output where the marginal cost is equal to the marginal revenue.
Thus, the concept of marginal cost is very useful in economic analysis.

Relationship between Average Cost and Marginal Cost:

Average cost and marginal cost are related to each other. They are related to each other in the following ways:
(i) When the average cost is rising, the marginal cost will be greater than the average cost.
(ii) When the average cost is constant, the marginal cost is equal to the average cost.
(iii) When the average cost is falling, the marginal cost will be less than the average cost.

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Average Fixed Cost = AFC = TFC/Q
Average Variable Cost = AVC =TVC/Q
Average Total Cost = ATC = TC/Q
Average Total Cost = AFC + AVC
Marginal Cost = DTC/DQ or ∆ TVC/∆ Q

Quantity FC VC TC MC AFC AVC ATC

0 50 0 50
1 50 50 100 50 50 50 100
2 50 78 128 28 25 39 64
3 50 98 148 20 17 33 49
4 50 112 162 14 13 28 41
5 50 130 180 18 10 26 36
6 50 150 200 20 8.3 25 33
7 50 175 225 25 7.1 25 32
8 50 204 254 29 6.3 26 32
9 50 242 292 38 5.6 27 32
10 50 300 350 58 5 30 35
11 50 385 435 85 4.5 35 40

14. Short-run

Short-run costs are costs in the short period. They are costs which vary with output, when fixed plant and capital equipment remain the
same.

15. Long-run Costs:

Long-run costs are those costs which vary with the output when all input factors including plant and equipments vary. Long-run costs
become important when the firm has to decide whether to set up a new plant or not. Long-run costs are helpful to a businessman in
planning the best state of plant or the best size of the firm for his purpose.

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 REVENUE

Revenue is the income. It is the sale value of units sold.

Revenue is the market value obtained by a business firm from the sale of its goods or services. It refers to the receipts from the sale of
a product in the market. It may be noted that revenue depends on the price of the output.

TOTAL REVENUE
Total revenue refers to the total income or receipts of a firm obtained from the sale of its product. In other words, total revenue is the
total sale proceeds from the sale of output by a firm.
Total revenue is obtained by multiplying the price per unit of the commodity by the quantity of output sold (i.e., by the total number of
units of the commodity sold). In short, the total revenue of a firm is:
Therefore, revenue = Price X Quantity sold
TR = PxQ
Where 'TR' refers to total revenue
'P' refers to price of the commodity per unit
'Q' refers to the quantity of goods sold
A car company sells 200 cars per month. The price per car is Rs. 5,00,000. In this case, the total revenue will be:
TR = PxQ,
i.e., 5,00,000 x 200 = Rs. 10,00,00,000.

AVERAGE REVENUE
Average revenue refers to the average sale proceeds or the average receipts per unit of output. In other words, it is the average revenue
per unit of the commodity sold. The average revenue can be obtained by dividing the total revenue by the number of units of a
commodity sold.
AR= TR ÷ Number of units sold
Where AR refers to average revenue TR refers to total revenue
A firm sells 100 scooters in a month and earns a total revenue of Rs. 4,00,000.
AR = 4,00,000 ÷ 100 = 40,000
It may be noted that average revenue is nothing but the price of the commodity per unit.
Average revenue and price are same in economics.

MARGINAL REVENUE
Marginal revenue is the addition to the total revenue by the sale of an additional unit of a commodity. In other words, the revenue
added to the total revenue by selling an additional unit is called marginal revenue.
Example:
A firm earns a total revenue of Rs. 40,00,000 by selling 100 units of a commodity.
Suppose the firm sells one more unit, i.e., 100 + 1 = 101 units, and earns Rs. 40,38,000. Units TR AR MR
sold
Marginal revenue is Rs. 40,38,000 - 40,00,000 = 38,000. That means, the marginal
revenue is the revenue derived from the sale of an additional unit. 1 15 15 15
2 28 14 13
Example with a table and diagram
3 39 13 11
4 48 12 9
5 55 11 7
6 60 10 5
7 63 9 3
8 64 8 1

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 MARKET STRUCTURE
Market does not mean any particular locality or place where goods are bought and sold. It covers the whole of a region or area or
contact between buyers and sellers of a commodity that makes them come to an agreement to keep a single price for the commodity at
any given time.

Features of a Market:
A market has certain characteristic features. The main features are:
l. The term "market" does not refer to any particular locality or place where goods are bought and sold.
3. It is contact between the buyers and sellers of a particular commodity. But there need not be personal contact between the buyers
and sellers of the particular commodity. The contact between the buyers and sellers may be established by mail (i.e., post), telephone,
telegraph or any other means of communication.
4. There must be perfect or free competition between buyers and sellers of the particular commodity so that a single price for the
commodity is kept at any given time.

TYPES OF MARKET STRUCTURE

Types of Market, Market Situation, Market Forms or Market Structures:
(1) Perfect competitive market, perfect market or perfect competition,
(2) Monopoly market or monopoly and
(3) Monopolistic or Imperfect competitive market, imperfect market or imperfect competition.

PERFECT COMPETITION
Perfect competition is a market where there are many sellers. In this type of competition no seller has control over the market.
Characteristics of a Perfectly Competitive Market
The following are the characteristics of a perfectly competitive market:
1. Large number of buyers and sellers
There are a large number of buyers and sellers in the market, and so no individual buyer or seller, however large, can control the price
of the product. This means the individual buyer or seller is an unimportant player in the market.
2. Homogeneous product
Homogeneous product means identical (same type) of product. All firms in the industry produce identical products. The products are
identical in quality, variety, color, design, packing and other selling conditions of the product.
3. Free entry and exit of firms
There are no blocks to entry or exit of firms. Entry or exit may take time, but firms have the freedom to move in or move out of the
industry.
4. They are the “Price takers”
In this type of competition a firm cannot decide on the price. They have to take the price what is given by the market or industry.
5. Dependent: They dependent of each other. They are controlled by the industry in the market. Therefore they are dependent on the
market
6. Perfect knowledge among buyers and sellers about market conditions
Buyers and sellers have perfect knowledge of the conditions of the market. They also have knowledge about the price for the
commodities in the market.
7. Perfect mobility
Since resources or factors of production are assumed to be mobile, they can be shifted in and out of the market easily. Goods and
services as well as other resources are perfectly mobile between firms.
8. Absence of transportation cost
In perfect competition, there is complete absence of transportation costs for moving the product from one part of the market to
another.
The assumptions of large number of sellers and product homogeneity imply that all individual firms in perfect competition are price
takers
It means that the firm takes the market price as given and is not capable of influencing price through its own behavior.

MONOPOLY
A monopolist is the only supplier of an industry’s product and has full control over the market.
There are several characteristics
1. Single Supplier or seller in the market: There is a single seller so the firm controls the whole market.
2. No close substitutes: There are no close substitutes for the firm’s product. There are no other products in the market like the firm’s
product
3. No Free entry and exit of firms: Entry into the industry by other firms is blocked. There is no free entry to other firms. The
monopolist does not allow other firms to enter the market. He will block their entry by keeping low prices, which other firms find
difficult to make profit.
4. They are the “Price makers”: The firm is a “price maker,” that is, the firm has control over the price. They make their own prices.
Prices are not controlled by the market or industry.

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5. Independent: They act independently of each other. They are not controlled by other firms but can control other firms in the
market.

MONOPOLISTIC COMPETITION (Imperfect Competition)

There are many producers or sellers who offer products that are either close substitutes but are not viewed as identical
1. Large number of buyers and sellers: There are many sellers but the firm has some control in the market.
2. Differentiated products
Firms in monopolistic competition make their products different from others may be in quality, packing, giving extra services etc.
They have close substitutes, but their products are not same. In other words, there are products available in the market, which are
similar to that of the firm.
3. Free entry and exit of firms (Low blocks to entry): There are less blocks for the firm to enter the market. In the long run they
can enter or leave the market with ease
4. They are the “Price makers”: Each supplier has some power over the price it charges : price makers
5. Independent: They act independently of each other. They are not controlled by other firms nor control other firms in the market.
6. Imperfect knowledge among buyers and sellers about market conditions
Buyers and sellers have imperfect knowledge of the conditions of the market. They do not have full knowledge about the price for
the commodities in the market.

Duopoly
When there are two sellers who share the monopoly power then it is called duopoly. (Points from monopoly). A duopoly refers to a
market where there are only two firms selling a particular product, service, or commodity. It is a special case of an oligopoly, which is
a market condition where the production of identical or similar products is concentrated in a few large firms.

Oligopoly
A. Oligopoly exists where a few large firms producing a homogeneous or differentiated product in a market.
1. There are few enough firms in the industry that they are mutually interdependent—each must consider its rivals’ reactions in
response to its decisions about prices, output, and advertising.
2. Some oligopolistic industries produce standardized products (steel, zinc, copper, and cement), whereas others produce differentiated
products (automobiles, detergents, and greeting cards).

Monspsony:
A monopsony, like a monopoly, signifies complete control over a particular market. However monopsony is different from a

monopoly. In a monopoly
, it is the sellers who have complete control over the market, but in a monopsony the control of the market lies with a single buyer.
Such a buyer is called a monopsonist. This buyer dictates the price of the product and exercises his complete control over the market,
right from its labor force to raw materials. In a market that boasts of a situation of perfect competition, none of the individual buyers
manage to acquire complete control.

Duopsony
Duopsony is similar to duopoly. In a duopsony there are two major buyers in a particular market. This is applicable for a particular
service or product in a market. It has been observed in a duopsony that buyers are able to lower prices of goods and services in a
market as a result of their influence over the sellers.

Oligopsony
Oligopsony is similar to oligopoly. In a Oligopsony there are few major buyers in a particular market. This is applicable for a
particular service or product in a market. It has been observed in a Oligopsony that buyers are able to lower prices of goods and
services in a market as a result of their influence over the sellers.