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Chapter 5 : Lesson 3 Costs, Revenue, and Profit Maximization

Chapter 5 : Lesson 3 Costs, Revenue, and Profit Maximization. Essential Question: Why is marginal revenue more important than the average revenue?. Pretend you are going to open a hotdog selling business. Now list your costs List the costs that vary with how much you produce

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Chapter 5 : Lesson 3 Costs, Revenue, and Profit Maximization

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  1. Chapter 5 : Lesson 3Costs, Revenue, and Profit Maximization

  2. Essential Question: Why is marginal revenue more important than the average revenue?

  3. Pretend you are going to open a hotdog selling business. • Now list your costs • List the costs that vary with how much you produce • List the costs that you always have no matter how much you produce. • What price do you charge per hotdog? How do you know how much to charge?

  4. Fixed Cost: the cost that a business incurs even if the plant is idle and output is zero. Also known as “overhead”

  5. Variable Cost: a cost that changes with output…associated with labor and raw materials

  6. Cost What is the equation total cost? FC + VC = TC

  7. Total Cost: sum of variable cost plus fixed cost; all costs associated with production.

  8. Revenue Equation P x Q = TR

  9. Units Bought Total Revenue Price 1.00 1,000 $1,000 1,000 1.25 800 TR PROFIT 1.50 500 750 2.00 200 400 5.00 50 250 3 30 10.00

  10. Units Bought Total Revenue Total Costs Price 1.00 1,000 $1,000 $330 1,000 290 1.25 800 230 1.50 500 750 2.00 200 400 135 5.00 50 125 250 3 30 116 10.00

  11. Units Bought Total Revenue Total Costs Price Profit 1.00 $670 1,000 $1,000 $330 1,000 290 710 1.25 800 230 520 1.50 500 750 265 2.00 200 400 135 5.00 50 125 125 250 (86) 3 30 116 10.00 Is business in the business to make a profit? NO!!! To MAXIMIZE PROFIT!!!!

  12. Break Even Point: the total output or total product the business needs to sell in order to cover its total costs • What is the # of units sold at $1.25 to break even?

  13. Marginal Revenue: extra revenue from all the sale of one additional unit of output

  14. Marginal Cost: extra cost of producing one additional unit of production.

  15. What is the profit maximizing output????

  16. Profit-Maximizing Quantity of Output : Level of production where marginal cost is equal to marginal revenue

  17. Profit Maximizing = MR = MC • Profit-Maximizing quantity of output: MR = MC

  18. The Production Function

  19. E-Commerce: electronic business or exchange conducted over the Internet.

  20. Review Question: Chapter 5 : Lesson 3 Read pages 142-146 and answer Review Questions on page 146. Hand in Google Class Room.

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