Final answer:
Value added is the economic value a company adds to its inputs and is calculated by subtracting the cost of intermediate goods from sales revenue. Profit is calculated as the difference between total revenues and total costs. Average total cost, average cost, and marginal product are additional concepts used to assess profitability and production efficiency.
Step-by-step explanation:
Value added refers to the additional worth created by a business when it enhances a product or service before offering it to customers. It represents the difference between the selling price of a product and the cost of purchased inputs used to produce it, such as raw materials and intermediate goods. In other words, it can be thought of as the economic value that a company adds to its inputs.
To calculate value added, you subtract the total cost of raw materials and other intermediate inputs from the sales revenue generated from the sale of the product. The formula for value added is: Value Added = Sales Revenue - Cost of Intermediate Goods. This figure shows how much value is contributed to the raw materials or intermediate products through the production process.
A related concept is profit, which reflects the financial gain a company receives for its products and is calculated as the difference between total revenue and total cost (including costs beyond only intermediate goods).
When discussing efficiency and profitability, concepts such as average cost, marginal product, and average total cost also become relevant. Average cost helps determine if a firm can be profitable at the market price by dividing total cost by total quantity of output produced. The marginal product is the additional output generated by adding one more unit of input, like labor, and is used to determine the optimal level of input in production.
Average total cost calculation involves dividing the total cost by the total output at different levels of production. If the firm's average cost of production is lower than the market price, the firm will be earning profits. This is often graphically represented as a U-shaped curve on a graph.