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

Calculate total cost.

Janey’s Sandwich Shop.– She rents a store for $1,200 a month.

– She pays a general liability insurance premium of $200.

– Utilities cost about $400.

– “Fixings” for the sandwiches usually cost about $2,500.00

– She pays her employees about $3,000.00

How much are her fixed costs per month?

How much are her variable costs per month?

How much are her total costs per month?

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, thenaverage total cost is $10.00

Janey’s Sandwich Shop

• Janey’s total costs were $7300.00

• She sells 2000 sandwiches per month.

What is the average total cost of each sandwich?

$7,300.00 ÷ 2000 = $3.65

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

• It’s determined by dividing the change in total cost by the change in quantity.

ΔTC ÷ ΔQ

ΔTC ÷ ΔQ = Marginal Cost

• Janey’s total cost change from $7300 to $7350. ΔTC = 7350-7300 = $50.

• She sells 2025. ΔQ = 2025-2000 = 25

• ΔTC ÷ ΔQ$50 ÷ 25 = $2.00

Businesses want to know total revenue

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

Janey’s Sandwiches $5.00 x 2,000 = $10,000

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

Δ R ÷ Δ QSold = Marginal Revenue

• Janey’s TR was $10,000.• She sold an additional 25 sandwiches. Now TR is

2025 x $5.00 = 10,125.

• Δ R ÷ Δ QSold

$125.00 ÷ 25 = $5.00

“ 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

Is Janey making a profit?

$10,000 – $7300 = $2700

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– 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

• 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 CreditDouble Credit: Bring in the stock : Bring in the stock market section from a newspaper.market section from a newspaper.