Business Costs and Revenues

1
Business Costs and Revenues

• Reference 6.1 and 6.2

2
Businesses need to know their total costs

• Total Costs Fixed Costs Variable Costs

Fixed Costs Costs that dont change based on
production. example rent
Variable Costs Costs that change with rate of
production example cost of raw materials
3
They may also want to know, on average, how much
each unit of the good costs them to produce

• Average total cost is determined by dividing the
  total costs by the number of goods produced
• (also, per-unit cost)

If total cost is 1,000.00 and we produce 100,
then average total cost is 10.00
4
Firms also want to know the marginal costShould
we produce more?

• Marginal cost is the additional cost of producing
  each additional good.
• In economics, marginal additional
• Its determined by dividing the change in total
  cost by the change in quantity.
• ?TC ?Q

5
Businesses want to know total revenue

• Total revenue is the price of the good times the
  number of the good sold.

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Businesses also want to know marginal revenue Is
it profitable to produce more?

• Marginal revenue is the additional revenue from
  selling each additional unit of the good.
• Its determined by dividing the change in total
  revenue by the change in quantity sold.
• ? R ? QSold

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How much should we produce?

• As long as marginal revenue is greater than or
  equal to marginal cost, a firm will continue to
  produce. MR MC
• If marginal revenue is less than marginal cost, a
  firm will not produce.
• MR lt MC

8
Are we making money?Is there a profit?

• To compute profit , subtract total cost from
  total revenue
• TR TC Profit

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Law of Diminishing Marginal Returns

• (may be used to determine the number of
  employees)
• If additional units of a resource are added to
  another resource that is fixed in supply,
  eventually the additional output of the good will
  decrease.

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Review

1. What do we have to subtract from total revenue to
   get profit?
2. The additional output obtained by adding an
   additional worker is 50 units per day. Each unit
   can be sold for 2. Is it worth hiring the
   additional worker if that worker must be paid
   150 per day?

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Review

• Identify the costs below as fixed or variable
• Rent for your building
• Wages for salaried employees
• Wages for hourly employees
• Raw materials for your product
• Commission checks to sales people
• Office Supplies
• Insurance (liability, fire, disability, etc.
• Shipping
• Advertising
• Utility Bills
• Research and Development

12
Homework

• Stock Market
• Read p. 614-615
• Read and note Ch 22.1 p. 616-626
• Complete Section Review p. 631 2-4
• Highlight the terms in 1 in your notes.
• Double Credit Bring in the stock market section
  from a newspaper.