Download Cost, Revenue, and Profit Maximization

1. As the price of movie DVD goes up, the amount producers are willing to supply also goes up. 2. As the price of movie DVD goes up, the amount consumers will demand,
or want to purchase, goes down.
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How does changing one variable affect the
other variable inputs of a firm?
it will eventually cause the other variables to
change b/c output has changed
Pull
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1. by adding fixed costs and variable costs; by multiplying the number of units sold times the average price 2. A profit results when total revenues exceed total costs; a loss results when total costs exceed total revenues.
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5­3 | Cost, Revenue, and Profit Maximization
I. Measures of Cost
* in order to make production decisions
businesses analyze fixed, variable, total &
marginal costs
A. Fixed Costs
1. fixed costs = overhead
a. even if no output, always there
b. machines & capital goods
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2. examples
a. management salaries
b. rent
c. taxes
d. depreciation on capital goods
B. Variable Costs
1. variable costs
a. change when rate of operation
or production changes
b. labor & raw materials
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2. examples
a. hourly labor
b. raw materials
c. freight charges
d. electricity
C. Total Costs
1. total cost
a. sum of fixed & variable
D. Marginal Costs
1. marginal cost
a. extra cost when one additional
product made
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b. shows change in total variable
costs when output increases
II. Applying Cost Principles
A. Costs and Business Operations
1. e­commerce
a. business conducted over Internet
2. don't need to worry about rent,
inventory = low fixed costs
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B. Break­even Point
1. break­even point
a. just enough $ to cover total
costs
2. most businesses want to do more in
order to make a profit
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III. Marginal Analysis & Profit Maximization
A. Total Revenue
1. total revenue
a. all revenue business receives
b. # units sold x avg price/unit
B. Marginal Revenue
1. marginal revenue
a. extra revenue when making one
more unit of output
b. divide change in total revenue by
marginal product
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C. Marginal Analysis
1. marginal analysis
a. compare extra benefits to extra
costs
b. add more variable input
(worker) & compare extra benefit
(marginal revenue) to additional
cost (marginal cost)
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D. Profit Maximization
1. profit­maximizing quantity of output
a. marginal cost = marginal
revenue
b. marginal cost < marginal
revenue = more workers
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