Transcript Business Costs and Revenues

Business Costs and
Revenues
Reference 6.1 and 6.2
Businesses need to know their total costs
• Total Costs = Fixed Costs + Variable Costs
Fixed Costs = Costs that don’t change based on production.
example: rent
Variable Costs = Costs that change with rate of production
example: cost of raw materials
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
Firms also want to know the marginal cost
Should we produce more?
• Marginal cost is the additional cost of
producing each additional good.
– In economics, marginal = additional
• It’s determined by dividing the change in
total cost by the change in quantity.
ΔTC ÷ ΔQ
Businesses want to know total revenue
• Total revenue is the price of the good
times the number of the good sold.
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.
• It’s determined by dividing the change in
total revenue by the change in quantity
sold.
Δ R ÷ Δ QSold
“ 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 < MC
“Are we making money?”
Is there a profit?
• To compute profit , subtract total cost from
total revenue
TR – TC = Profit
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.
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?
Review
• Identify the costs below as fixed or variable
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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
Homework:
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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.