1. Cost, Revenue, and Profit Maximization
Econ 10/2

2. Warm Up
Pretend you own a local burger joint. What are your potential costs?

3. Measures of Cost Cost of inputs influences production decisions
In order to make these decisions easier, cost is divided into categories
Fixed Costs: the cost that a business incurs even when production is zero or a lot
AKA overhead
Does not change
Ex. Salaries for executives, rent payments, property taxes

4. Measures of Costs
Variable Costs: a cost that changes when the rate of operation or output changes
Ex. Electric power, workers wages, raw materials
If you are making more, the costs are more
Total Costs: the sum of all the fixed and variable costs
Marginal Costs: the extra cost incurred when a business produces one additional unit
A per unit increase in variable costs

5. Applying Cost Principles
Gas Station– many pumps, one attendant
High fixed costs (the land, pumps, tanks, taxes, licensing fees)
Lower variable costs (one employee, electricity, gas sold)
Able to operate 24-7
Amazon or other “e-commerce businesses”
Lower fixed costs (storage centers, software does a lot of the labor)
Also able to operate 24-7

6. Measures of Revenue Total Revenue: quantity times price
Marginal Revenue: extra revenue from producing and selling one more good
Ex. T-shirts. If my business has no workers, I get no output and therefore no revenue
When I hire the first worker they make 7 shirts and $105 is earned (revenue).
That means each shirt added $15 and $15 is the marginal revenue of having one more worker
Marginal revenue often starts high and decreases as more is produced

7. Marginal Analysis
Marginal Analysis: a type of cost-benefit decision making that compares the extra benefits to the extra costs
When marginal costs are less than marginal revenue, more variable inputs should be hired to expand output
Profit-Maximizing quantity of output is when marginal cost equals marginal revenue