Ch 5.2 and_5.3_notes
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Total revenue is the total amount earned from sales and is calculated as price times quantity sold. Marginal revenue is the change in total revenue from selling one more unit. There are two types of costs - fixed costs that do not change with output like rent, and variable costs that do change like labor. Total cost is the sum of fixed and variable costs. Marginal cost is the change in total cost from producing one more unit. Businesses aim to produce at the quantity where marginal cost equals marginal revenue to maximize profit, which is total revenue minus total cost. E-commerce firms have lower fixed costs than traditional stores since they do not need physical retail space or large inventories.
Ch 5.2 and_5.3_notes
- 1. Chapter 5.2 & 5.3 Cost, Revenue and Profit LINDQUIST - ECONOMICS
- 2. Total Revenue Total amount earned by a firm from the sale of its products Total Revenue = price times output Price x Amount of units sold Marginal Revenue =Extra revenue from the sale of one additional unit of output.
- 3. Costs Fixed costs (FC) – Costs that stay the same regardless of level of production. rent property tax insurance premiums
- 4. Costs Fixed costs Variable costs (VC) - costs that change with output or Production levels change labor Materials/INPUTS capital goods
- 5. Costs Fixed cost + Variable cost = Total Cost (TC)
- 6. Costs Marginal Costs (MC) = cost of producing one more unit
- 7. E-Commerce Example • Companies such as Amazon.com have been able to offer a wide range of products while keeping their overhead low. • What helps e-commerce (Electronic Businesses) firms to reduce cost? – E-Comerce does not have to pay rent or keep large inventories. Traditional stores have MORE FIXED COSTS
- 8. Profit/Loss Profit/Loss = Total Revenue minus Total Cost (TR-TC)
- 9. So how do you know how to produce? • How do businesses decide how many workers to hire? • How do they measure how many INPUTS to use for MAXIMUM PRODUCTION??
- 10. Businesses Decisions • Total Product: total output or production by a firm • Output: Stuff the business produces • Inputs: Stuff that was necessary to produce the output. • Marginal Product: Extra output due to the addition of one more unit of input
- 11. Stages of Production • STAGE 1: INCREASING MARGINAL RETURNS – Specialization of labor • STAGE 2: DECREASING or Diminishing Marginal Returns – Law of diminishing returns – Stage where output increases at a decreasing rate • STAGE 3: NEGATIVE MARGINAL RETURNS – Workers in the way