Activator
• With a partner, open a hotdog selling
business.
– Now list your costs
• List the costs that vary with how much you produce
• List the costs that you always have no matter how much
you produce.
– What price do you charge per hotdog? How do
you know how much to charge?
Costs, Revenue, and Profit
Maximization
EQ: What is the # one goal of all
firms?
Cost
• Fixed Cost: the cost that a business incurs
even if the plant is idle and output is zero.
Also known as “overhead”
• Variable Cost: a cost that changes with
output…associated with labor and raw
materials
Cost
What is the equation total cost?
FC + VC = TC
NHS Hotdog Vending, Inc.
Revenue
P x Q = TR
Units
Total
Price Bought Revenue
1.00
1,000
$1,000
1.25
800
1,000
1.50
500
750
2.00
200
400
5.00
50
250
10.00
3
30
TR
PROFIT
Units
Total
Total
Price Bought Revenue Costs
1.00
1,000
$1,000
$330
1.25
800
1,000
290
1.50
500
750
230
2.00
200
400
135
5.00
50
250
125
10.00
3
30
116
Units
Total
Total
Price Bought Revenue Costs
Profit
1.00
1,000
$1,000
$330
$670
1.25
800
1,000
290
710
1.50
500
750
230
520
2.00
200
400
135
265
5.00
50
250
125
125
(86)
3
30
116
10.00
Is business in the business to make a NO!!!
To MAXIMIZE
PROFIT!!!!
profit?
Break even point
• Break Even Point: the total output or total
product the business needs to sell in order to
cover its total costs
• What is the # of units sold at $1.25 to break
even?
Rate each slice of imaginary pizza on a
scale of 1-10 for your enjoyment!
Slice #
Enjoyment
1
10
2
3
4
5
6
7
Marginal Enjoyment
Marginal Analysis
• Marginal Analysis: a type of cost-benefit
decision that compares the extra benefits to
the extra costs of an action
– Marginal Revenue - what is the additional revenue
gained from producing one more unit?
– Marginal Cost - what is the additional increase in
costs by adding one additional unit of input?
Profit Maximizing = MR = MC
• Profit-Maximizing quantity of output:
MR = MC
What is the profit maximizing
output????
Q
P
TR
MR
TC
0
$6
$0
1
$6
$5
2
$6
$8
3
$6
$12
4
$6
$17
5
$6
$23
6
$6
$30
7
$6
$38
8
$6
$47
$3
MC
Profit
(TR-TC)
Change
in Profit
Diminishing Marginal
Return/Utility/Product
The Production Function
PASSWORD
•
•
•
•
•
•
•
Fixed cost
Variable Cost
Revenue
Profit
Marginal Revenue
Marginal Cost
Sunk Cost
http://delpiano.com/photojourney/assets/images/aug3004.jpg
Lettuce Farmer in Maryland
Lettuce was selling for $5 per crate, so my
uncle and dad decided to get into lettuce farming.
$1 per crate
$1 per crate
Plant and grow lettuce
Pull it, crate it, ship it
By harvest time, the price of lettuce had
dropped to $1.75 per crate.
What should my father do?
He should pull it, crate it, and ship it. Why?
Because it is better to lose just 25 cents a
crate than $1 a crate.
Lettuce Farmer in Kansas
Lettuce was selling for $5 per crate, so my
dad decided to get into lettuce farming.
#1 $1 per crate
#2 $1 per crate
Plant and grow lettuce
Pull it, crate it, ship it
Which dollar is my dad concerned with,
dollar #1 or dollar #2?
Dollar #2, and only dollar #2. Why?
There is nothing he can do about dollar #1.
Dollar #1 is sunk, done and over with. Can he
ever get that dollar back?
NO!
S
U
N
K
C
O
S
T
S
Sunk costs – are costs that are incurred
that are sunk, done, and over with.
There is nothing you can do about them.
They are irrelevant to your current
decision-making process.
**Once the Cost is incurred it is a
Sunk Costs**
**All Sunk Costs are fixed, but not
all Fixed Costs are sunk costs**