EPF2e. How Costs & Revenue Affect Profit & Supply

Role of Producers & Consumers

in a Market Economy

2

Profit is

• an incentive and reward for business owners. • to survive, a business must earn a profit.

3

WHAT IS THE DIFFERENCE BETWEEN COST & PRICE?

Essential question:

4

Cost and Price• Cost – is the money spent for

the inputs used (e.g. labor, raw materials, transportation, energy) to produce a good or service

• Price – is the amount consumers pay for a good or service

5

WHAT IS THE DIFFERENCE BETWEEN REVENUE AND PROFIT?

Essential question:

6

Revenue and Profit

• Revenue - is the income generated by the sale of goods and services

Revenue = price x quantity• Profit - is the amount remaining when all

costs are subtracted from all revenuesProfit = Total Revenue – Total Cost

7

HOW IS PROFIT CALCULATED?

Essential question:

8

Profit Formula

• Profit is the amount remaining when all costs are subtracted from all revenues.

• Profit = Total Revenue – Total Cost

9

HOW CAN CHANGES IN THE COSTS OF PRODUCTION AFFECT PROFITS AND THE PRICE OF THE GOODS OR SERVICES PRODUCED?

Essential question:

10

HOW DO CHANGES IN COSTS OF PRODUCTION AFFECT THE QUANTITY OF A GOOD OR SERVICE THAT WILL BE PRODUCED?

Essential question:

11

When costs of inputs rise:A. profit will fallB. or the price of the good or service will be

increase and sales may decrease• For example, when the cost of lumber goes

up, homebuilder profits will fall or the price of houses will go up

12

When costs of inputs decrease:A. Profits can increaseB. Or the price of the good or service can be

decreased and sales may increase• For example, when the costs of lumber goes

up, homebuilder profits will fall or the price of houses will go up

13

Supply

• Refers to the quantity of a good or service that will be brought o market at every price at a given time

• When cost of production rises, supply will decrease

• When cost of production decreases, supply will increase

14

Summary

• Rising costs tend to decrease profits and lead to higher prices.

• Falling costs tend to increase profits and lead to lower prices.

• A change in the cost of production influences how much will be supplied.