Chapter 5 Section 3
Cost, Revenue, and Profit Maximization
Measures of Cost
• Every Business has both Fixed and
Variable Cost
• Fixed Cost
• Cost that every business has even if you are
not producing
• EX) Rent, taxes, salaries
• Variable Costs
• Costs that change along with Output
• Overhead
• Measure of your total Fixed Costs
More Cost
• Total Cost
• Fixed + Variable costs, leads to…
• Marginal Cost
• Additional Cost of producing one more unit
output
• This is important because you are maximizing profit
when Marginal Revenue is equal to Marginal Cost
Cost Principles
• E-Commerce has lowered cost
• Things sold electronically over the Internet
• Break Even Point
• Point at which we are not losing money,
making Profit
• How do we Maximize Profit?
Marginal Analysis and Profit Maximization
• Total Revenue
• All Revenue that a business receives
• Marginal Revenues
• Extra Revenue received by adding an
additional unit of output
• Marginal Analysis
• Decision Making process that involves looking
at the benefit of an action compared to the
extra cost
• Profit-Maximizing quantity of output
• Marginal Revenue is equal to marginal cost