Cost and Profit
WHAT ARE COSTS AND PROFITS?
HUNGRY HELEN’S COOKIE FACTORY
• Helen, the owner of the cookie factory, buys flour, sugar, flavorings, and other cookie ingredients. • She also buys the mixers and the ovens and hires workers to run the equipment. • She then sells the resulting cookies to consumers.
2
TOTAL REVENUE, TOTAL COST, AND PROFIT
• The amount that Helen receives for the sale of its output (cookies) is its total revenue. • The amount that the firm pays to buy inputs (flour, sugar, workers, ovens, etc.) is called total cost.
3
TOTAL REVENUE, TOTAL COST, AND PROFIT
• Helen gets to keep any revenue that is not needed to cover costs. We define profit as a firm’s total revenue minus its total cost. That is,
PROFIT = TOTAL REVENUE – TOTAL COST
• Helen’s objective is to make her firm’s profit as large as possible.
4
TOTAL REVENUE, TOTAL COST, AND PROFIT
• To see how a firm goes about maximizing profit, we must consider fully how to measure its total revenue and its total cost. Total revenue is the easy part: it equals the quantity of output the firm produces times the price at which it sells its output. • If Helen produces 10,000 cookies and sells each cookie at $2, her total revenue is (10,000 x $2), or $20,000. 5
COSTS AS OPPORTUNITY COSTS
• The measurement of a firm’s total cost is more complicated. • When measuring costs of any firm, it’s important to keep in mind that the cost of something is what you give up to get it.
6
COSTS AS OPPORTUNITY COSTS
• Remember that the opportunity cost of an item refers to all those things that must be forgone to acquire that item. • When economists speak of a firm’s cost of production, they include all the opportunity costs of making its output of goods and service. • A firm’s opportunity costs of production are sometimes obvious and sometime less so.
7
• When Helen pays $1,000 for flour, that’s $1000 is an opportunity cost because Helen can no longer use that $1,000 to buy something
HUNGRY HELEN’S COOKIE FACTORY
• Helen, the owner of the cookie factory, buys flour, sugar, flavorings, and other cookie ingredients. • She also buys the mixers and the ovens and hires workers to run the equipment. • She then sells the resulting cookies to consumers.
2
TOTAL REVENUE, TOTAL COST, AND PROFIT
• The amount that Helen receives for the sale of its output (cookies) is its total revenue. • The amount that the firm pays to buy inputs (flour, sugar, workers, ovens, etc.) is called total cost.
3
TOTAL REVENUE, TOTAL COST, AND PROFIT
• Helen gets to keep any revenue that is not needed to cover costs. We define profit as a firm’s total revenue minus its total cost. That is,
PROFIT = TOTAL REVENUE – TOTAL COST
• Helen’s objective is to make her firm’s profit as large as possible.
4
TOTAL REVENUE, TOTAL COST, AND PROFIT
• To see how a firm goes about maximizing profit, we must consider fully how to measure its total revenue and its total cost. Total revenue is the easy part: it equals the quantity of output the firm produces times the price at which it sells its output. • If Helen produces 10,000 cookies and sells each cookie at $2, her total revenue is (10,000 x $2), or $20,000. 5
COSTS AS OPPORTUNITY COSTS
• The measurement of a firm’s total cost is more complicated. • When measuring costs of any firm, it’s important to keep in mind that the cost of something is what you give up to get it.
6
COSTS AS OPPORTUNITY COSTS
• Remember that the opportunity cost of an item refers to all those things that must be forgone to acquire that item. • When economists speak of a firm’s cost of production, they include all the opportunity costs of making its output of goods and service. • A firm’s opportunity costs of production are sometimes obvious and sometime less so.
7
• When Helen pays $1,000 for flour, that’s $1000 is an opportunity cost because Helen can no longer use that $1,000 to buy something