1. Business Costs Revenue minus expenses = Profit or Loss

2. The Need for Profit A business must have profit in the long run to stay in business. Losses in the long run will force a business to shut down.

3. The Long Run In economic models, the long-run time frame assumes no fixed factors of production. Firms can enter or leave the marketplace, and the cost (and availability) of land, labor, raw materials, and capital goods can be assumed to vary.economicfactors of productionFirms marketplacelandlaborraw materialscapital goods

4. In other words… The long run is the time necessary to make any change AND ALL COSTS ARE VARIABLE IN THE LONG RUN

5. Short Run Costs In the Short Run, a business faces Fixed Costs - Costs that do not vary with production Variable Costs – Costs which vary with production

6. In other words… As you increase production, your fixed costs do not change, but… As you increase production, your variable costs will increase…and as you decrease production, your variable costs will decrease.

7. A business may have a loss in the short run, but the revenue must cover the fixed costs, or the business must shut down.

8. FC + VC = TC Fixed Costs + Variable Costs = Total Costs

9. Costs are a major determinant of Supply When a business graphs its average costs of production and then graphs the cost of increasing production, the Marginal Cost (MC), it can find the prices and quantities that it is willing and able to sell the product in the market. This is known as the supply curve.

10. Note the green supply/mc curve with the red average variable and average total cost curves.

11. Now, review supply and demand shifters Remember- T.I.P.S.C.E changes can shift the Demand Curve. Changes in the cost of production, number of sellers, taxes, expectations can shift the Supply Curve.