Cost and revenue analysis examines the cost of production and the 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, and its profit or loss is primarily determined by its costs and revenue:
Profit (or) Loss = Total Revenue – Total Cost
Costs and revenue decide the production behaviour of a firm and its supply behaviour in the market.
1. Cost Analysis and the Cost Function
- Cost refers to the total expenses incurred in the production of a commodity.
- Cost analysis is the study of behaviour of cost in relation to one or more production criteria – size of output, scale of production, prices of factors and other economic variables.
- The functional relationship between cost and output is called the Cost Function: C = f (Q), where C = Cost and Q = Quantity of output.
- Cost functions are derived functions, because they are derived from Production Functions.