What does it cost? Chapter 5 Section 3. Tiger T-shirt Company You can sell T-shirts for $15 Demand ensures you will sell out How many people should you.

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Presentation transcript:

What does it cost? Chapter 5 Section 3

Tiger T-shirt Company You can sell T-shirts for $15 Demand ensures you will sell out How many people should you hire to maximize profit? What do you need to know?

Fixed Costs "Overhead" o Rent o Taxes o Interest on loans

Variable Costs Salaries Advertisement Travel Raw Materials Utilities Other Business expenditures

Total Cost Fixed + Variable = Total Cost

School Costs Examples of Fixed costs? Examples of Variable costs?

Marginal Cost (p134) Def: Extra cost incurred when producing one more unit of output. Example 1: T-shirt company Fixed Cost = $50 Variable Cost = $90 per worker Workers = 1 Total Cost = 140 T-Shirts Produced = 7 Marginal Product = 7 Marginal Cost = $90/7 = 12.86

Marginal Cost (page 134) Example #2 Fixed Cost = $50 Variable Cost = $90 per worker Workers = 2 Total Cost = 230 T-Shirts Produced = 20 Marginal Product = 13 Marginal Cost = $90/13 = 6.92

Break Even Point When do you start making money in your T- shirt business?

How to make money? Total Revenue: All money business receives Marginal Revenue: Extra revenue from production and sale of one unit o Change in total revenue/marginal product o 105/7 = $15 o 195/13 = $15 Marginal analysis o Compare Marginal Revenue to Marginal Cost o How many people should your business hire?