Chapter 3 Economics in the United States 3.3

Profit Profit is the money a business or person makes after expenses have been paid. Profits are very important to free enterprise. No business can survive without at least ______ profit. It is _________ to make a profit because there is no guarantee that consumers will buy what producers offer. Producers have to work hard to keep their costs ______ in order to make a profit. Producers also have to work hard to __________________, or else their consumers may turn to other businesses.

How Are Profits Measured? To measure profits, economists look at both total revenue and total cost. Total Revenue: Found by multiplying the number of units sold by the price Ex: If a business sells 1,000 bikes for an average price of $200, the total revenue is $200,000. (1,000 X $200 = $200,000) Total Cost: Ex: If the cost of making a bike is $150 and a business sells 1,000 bikes, the total cost is $150,000. (1,000 X $150 = $150,000) The difference between the total revenue and the total cost is the profit. Total Revenue - Total Cost = Profit

How Are Costs Measured? There are two types of costs: fixed and variable. Fixed Cost: Sometimes fixed costs are called overhead. Overhead: Ex: The bicycle business needs a factory, machinery, tools, and equipment. The costs of these things are fixed.

How Are Costs Measured? (cont.) Variable Cost: The two most important variable costs are labor and raw materials. The number of workers can change as more or less prodcuts are made. The hourly wages can change. Insurance rates for workers also change often. The price of raw materials can also change quickly. Other variable costs include office supplies and property taxes. Ex: If the bicycle company is selling a lot of bikes, they may hire more workers. Or, if they are not selling as many bikes, they may lay off workers. Lay Off: This means that the workers lose their jobs.

Competition and Profit Competition is supposed to keep profits from becoming too______. When a new product comes out, the profit is very high because so many people want that product. Ex: When the first DVD players were made, the price was very high and profits were high because many people wanted one. Other businesses then started producing DVD players. The first company that sold DVD players now made less of a profit. The competition __________ production and also _________ the price.

Losses Losses are the opposite of profits. Loss: Ex: If the bicylce company has to lower the price of the bike from $200 to $100, they have lost $50,000. Remember that before, the company’s total cost was $150,000 (1,000 X $150 = $150,000). Now the company’s total revenue is $100,000 (1,000 X $100 = $100,000). The profit is - $50,000 ($100,000 - $150,000 = - $50,000). The company has lost money!

Why Are Profits Important? Profits are important because they provide ______ (things of worth, often money). The profit a business makes pays for new equipment and supplies. Profit allows the business to __________________________. Businesses that cannot _________ with other businesses do NOT make a profit. If a business loses money often, they may be _________________!