1. Chapter 5 : Lesson 3 Costs, Revenue, and Profit Maximization

2. Essential Question: Why is marginal revenue more important than the average revenue?

3. Pretend you are going to 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?

4. Fixed Cost: the cost that a business incurs even if the plant is idle and output is zero. Also known as “overhead”

5. Variable Cost: a cost that changes with output…associated with labor and raw materials

6. Cost
What is the equation total cost?
FC + VC = TC

7. Total Cost: sum of variable cost plus fixed cost; all costs associated with production.

8. Revenue Equation
P x Q = TR

9. TR PROFIT Units Bought Total Revenue Price 1.00 1,000 $1,000 1.25 800
1.50
500
750
2.00
200
400
The first thing you had to do was determine how much you should charge for your hot dogs. You came up with the following prices and figured roughly how many hot dogs would be bought at each of these prices ($1 to $10). (Click until you reach a price of $10 with 3 units bought at that price) Here is a simple questions, what three people in their right mind would purchase a hot dog at $3? Answer—people who are really, really hungry, people who might want to show off to their date, people who have a lot of money, etc.
Ask the students how many of them would sell the hot dogs for $10 each. None of them will raise their hands unless you have a real goof off in your class. Ask how many would sell for $1.00? How many at $1.25? 1.50? 2.00? 5.00? After asking this simple question, ask them what they get when they multiply Price times Quantity (units bought). Give them time to answer. The answer--Total Revenue (click). Give the Total Revenue figures for each price charged (clicking). Now ask the students what price they would charge for their hot dogs--$1.00? $1.25? $1.50? $2.00? $5.00? $10.00?
Tell the students they DON”T KNOW; (click) TR (click) does NOT EQUAL PROFIT!!!! How do businesses determine profit? Total revenue – Total costs = Profit. Are businesses in business to make a profit? NO! Businesses are in business to MAXIMIZE PROFITS!!
5.00 50
250
10.00 3 30

10. Units Bought Total Revenue Total Costs Price 1.00 1,000 $1,000 $330
1.25
800
1,000
290
1.50
500
750
230
2.00
200
400
135
(Click) Now show the total costs column (clicking) (Give the students time to write this in their notebooks). Why would it cost $116 to produce three hot dogs? Explain to the students that most of those costs are fixed costs. Remember when starting a business one has fixed costs just to open the business (rent, machinery payments, business license, salary employees). Fixed costs are those costs that remain constant whether you produce zero hot dogs or a zillion hot dogs. These costs must be paid. So when those three hot dogs cost $116 to produce, most of those costs are in fixed costs.
5.00 50
250
125
10.00 3 30
116

11. Is business in the business to make a profit?
Units
Bought
Total
Revenue
Total
Costs
Price
Profit
1.00
1,000
$1,000
$330
$670
1.25
800
1,000
290
710
1.50
500
750
230
520
265
2.00
200
400
135
Again, ask the students how profit is figured. Total revenue – total costs. (Click) Show the potential profit at each price. Now ask the students what price they would charge for hot dogs. Most will say $ Ask the students again, “is business in business to make a profit”? Some students will still say, “yes.” Tell them “NO”! If business were in business to make a profit, then why wouldn’t this business sell its hot dogs for $1.00, $1.50, $2.00, and $5.00? Because the firm MAXIMIZES profits at $1.25.
If you have a goof off in your class who said the business should charge $10 for the hot dog, tell him or her congratulations; they just lost themselves $86. This is called operating in the red. Operating in the black is beautiful; operating in the red is bad. Why is it called operating in the red? Several years ago, when businesses were losing money, this loss was shown in red figures on their income statements. Today, losses are not printed in red figures, but instead, are printed inside of parentheses. So instead of it being called operating in the red, we will now call it operating inside the parentheses.
5.00 50
250
125
125
10.00 3 30
116
(86)
Is business in the business to make a profit?
NO!!!
To MAXIMIZE PROFIT!!!!

12. 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?

13. Marginal Revenue: extra revenue from all the sale of one additional unit of output

14. Marginal Cost: extra cost of producing one additional unit of production.

15. What is the profit maximizing output????Q P TR MR TC MC
Profit (TR-TC)
Change in Profit $6 $0 $3 1 $5 2 $8 3
$12 4
$17 5
$23 6
$30 7
$38 8
$47

16. Profit-Maximizing Quantity of Output :
Level of production where marginal cost is equal to marginal revenue

17. Profit Maximizing = MR = MC
Profit-Maximizing quantity of output:
MR = MC

18. The Production Function

19. E-Commerce: electronic business or exchange conducted over the Internet.

20. Review Question:
Chapter 5 : Lesson 3
Read pages and answer Review Questions on page 146. Hand in Google Class Room.