Review of Cost And Revenue Curves - SS2 Economics Lesson Note
Cost and revenue curves are graphs that show the relationship between costs, revenues, and output levels in a business. Cost curves show the relationship between the cost of producing a particular quantity of goods and the quantity of goods produced.
There are different types of cost curves:
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Total cost curve: It shows the total cost of producing a given quantity of goods. It slopes upward, as the cost of producing more goods increases.
Average cost curve: It shows the average cost per unit of output. It slopes downward at first, as fixed costs are spread over more units of output, but then it slopes upward as the marginal cost of production increases.
Marginal cost curve: It shows the additional cost of producing one more unit of output. It slopes upward, reflecting the law of diminishing returns, which states that as production increases, the marginal cost of each additional unit of output also increases.
On the other hand, revenue curves show the relationship between the revenue earned from producing a particular quantity of goods and the quantity of goods produced.
There are different types of revenue curves:
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Total revenue curve: It shows the total revenue earned from selling a given quantity of goods. It slopes upward, as the revenue from selling more goods increases.
Average revenue curve: It shows the average revenue per unit of output. For most businesses, average revenue is equal to price. Therefore, the average revenue curve is a horizontal line at the market price.
Marginal revenue curve: It shows the additional revenue earned from selling one more unit of output. It slopes downward, reflecting the fact that as a business sells more units of output, the price it can charge for each additional unit decreases.
Cost and revenue curves provide businesses with important information about the relationship between costs, revenues, and output levels, which can help them make informed decisions about pricing, production levels, and overall profitability.