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Economic Theory

8. COSTS, PROFIT AND BREAK EVENT POINT

Content

1. Cost of production.
2. Total revenue and profit. Maximizing Profits.
3. Break-even point.

4. Forms of market and price determination.

Key words: fixed costs, variable costs, total costs, price, quantity of

goods, economic profit, total revenue, break-even point, market, perfect
competition, monopoly, monopolistic competition, oligopoly.

1. Cost of Production
The concept of cost is of great significance in the micro economic

theory. It is the cost of production which determines the production
decision of an entrepreneur whose main aim is to maximize profit. Lower
the cost of production, greater is the profit margin.
The expenses incurred on all inputs of production–both factor inputs

and non-factor inputs are known as the cost of production. Land, labor,
capital and organization are the factors of production called factor inputs.
Raw materials, fuel, equipment, tools etc. are non factor inputs. Thus, cost

is a function of various factors.
Real Cost and Nominal Cost. Real costs refer to those payments,
which are made to factors of production for the toil and efforts in
rendering their services. Real cost is estimated in terms of the pain and

sacrifices of labor. It is also the cost of waiting.
Nominal cost is the money cost (expenses) of production incurred on
various inputs of production.

Explicit and Implicit Costs. Explicit costs are the paid out costs.
These are the payments made for productive resources purchased or hired
by the firm. These include wages paid to the laborers, rent paid for the

premises, payments made for the raw materials, payments into
depreciation accounts, premium paid towards insurance against fire, theft,
etc. According to Leftwitch, “Explicit costs are those cash payments which

firms make to outsiders for their services and goods.” These costs appear
in the accounting records of the firm.

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