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

PROFIT TR Price Units Bought , Total Revenue $1,000 1,

Price Units Bought , Total Revenue $1,000 1, Total Costs $

Price Units Bought , Total Revenue $1,000 1, Total Costs $ Profit $ (86) Is business in the business to make a profit? NO!!! To MAXIMIZE 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 #EnjoymentMarginal 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???? QPTRMRTCMCProfit (TR-TC) Change in Profit 0$6$0$3 1$6$5 2$6$8 3$6$12 4$6$17 5$6$23 6$6$30 7$6$38 8$6$47

Diminishing Marginal Return/Utility/Product

The Production Function

PASSWORD Fixed cost Variable Cost Revenue Profit Marginal Revenue Marginal Cost Sunk Cost

Lettuce Farmerin Maryland $1 per cratePlant and grow lettuce $1 per crate 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? Lettuce was selling for $5 per crate, so my uncle and dad decided to get into lettuce farming. 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 Farmerin Kansas $1 per cratePlant and grow lettuce $1 per crate Pull it,crate it,ship it Lettuce was selling for $5 per crate, so my dad decided to get into lettuce farming. Which dollar is my dad concerned with, dollar #1 #1 or dollar #2? #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**