Presentation Transcript

1. Cost, Revenue, and Profit Maximization

   Unit Three, Lesson Five Cookonomics
2. The Purpose of a Business What is the purpose of a business? If you are a business owner, what do want? Hopefully you said to make the most money possible (which is very different than making the most amount of a product possible). How do we make money? We earn more than we spend. There are a few fancy terms that economists use to explain this very simple idea.
3. Businesses are in business to make money!
4. Costs A business must analyze costs before making decisions. To simplify decision making, cost is divided into several different categories. Fixed cost—cost a business incurs even if the plant is idle and output is zero -In other words, how much it costs you to have the company even if you aren’t producing anything Examples: salaries, rent, property taxes, car notes
5. Costs Variable costs—costs that change when the business rate of operation or output changes Costs that change according to how much you produce Examples: wages (per hour), electricity bill, freight/shipping charges
6. Costs Total cost (or overhead)—the sum of the variable and fixed costs Marginal Costs—extra cost incurred when a business produces one additional unit of a product How much do total costs increase if you produce one more unit of output? Fixed costs do not change—marginal cost is the per unit increase in variable costs that stems from using additional factors of production.
7. Revenue (Makin’ Money) We want to make more than we spend. We’ve already looked at what we spend (costs), now we need to look at the amount of money we pull in (revenues). Total Revenue—total amount of money that comes into the business # of units sold multiplied by average price per unit Or quantity sold multiplied by price per unit
8. Revenue Marginal revenue—extra revenue associated with the production and sale of one additional unit of output MR = difference in total revenue / marg. Prod.
9. Marginal Analysis Economists use marginal analysis, a type of cost-benefit decision making that compares the extra benefits to the extra costs of an action. This analysis will show us when we are losing money, when we are making money, and when we are breaking even. Break-even point—total output or total product the business needs to sell in order to cover its total costs.
10. Marginal Analysis A business wants to do more than just cover its costs and break even. It wants to make money! That’s the goal of a business. We want to minimize our costs and maximize our revenues to find the point that will make use the most amount of money Profit-maximizing quantity of output—when marginal cost and marginal revenue are equal.
11. Profits Profit—your revenue minus your costs (how much is left over after you pay your bills) Total profit—Total revenue minus total costs The total profit is maximized where marginal costs equal marginal revenue. This is were business should operate to make the most possible money. This is where they are not missing any would be profits and they are not losing any money.