Costs And Revenues

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Costs And Revenues

  1. 1. Costs and Revenues Chapter 18 Section 2 Indicators used to decide how MUCH TO PRODUCE
  2. 2. Summer <ul><li>Let’s pretend you just graduated from 7 th grade. </li></ul><ul><li>Your parents were so happy that they gave you a graduation gift </li></ul>
  3. 3. <ul><li>It was your their way of encouraging you to get a job </li></ul>
  4. 4. How to Make a Glass of Lemonade <ul><li>Step 1 – Cut Lemon in half, squeeze into cup with ice in it. </li></ul><ul><li>Step 2 – Add two scoops of sugar </li></ul><ul><li>Step 3 – Add Water </li></ul><ul><li>Step 4 – Stir </li></ul><ul><li>Step 5 – Enjoy! </li></ul>
  5. 5. A Trip to the ACME <ul><li>What is on our Shopping List? </li></ul><ul><ul><li>Lemons </li></ul></ul><ul><ul><li>Cups </li></ul></ul><ul><ul><li>Ice </li></ul></ul><ul><ul><li>Sugar </li></ul></ul>
  6. 6. What are some other expenses? <ul><li>Rent </li></ul><ul><li>Workers </li></ul><ul><li>Infrastructure (investments) </li></ul>
  7. 7. What is Cost? <ul><li>The amount of $$$ coming out of your pocket when you are producing goods and services. </li></ul><ul><li>“ Unit” – a term used to describe the “goods and services” </li></ul><ul><li>ex: Bicycle Helmet, DVD, Wheat, Cup of Lemonade, etc </li></ul>
  8. 8. Fixed Cost <ul><li>When costs are the same no matter how many units of a good are produced. </li></ul><ul><li>Rent and Taxes… </li></ul>
  9. 9. Variable Costs <ul><li>Costs that Change with the number of units produced… </li></ul><ul><li>Ex: Wages and Raw Materials </li></ul><ul><li>Increase as production grows…and Decreases with a productivity decreases… </li></ul>
  10. 10. Total Costs <ul><li>Fixed Costs + Variable Costs= Total Cost </li></ul><ul><li>Also…. “Average Total Cost” </li></ul><ul><li>With all of your variable costs changing….it is hard to tell how much money you are making…Average Total Costs would be Total Cost divided by # of units sold. </li></ul>
  11. 11. Marginal Costs <ul><li>Marginal Cost is the amount of money that it takes to produce one more “unit”. </li></ul><ul><li>We will look at this in a minute…. </li></ul>
  12. 12. Business is Booming
  13. 13. Revenue <ul><li>The amount of $$$ that comes into your pocket after you are done producing goods and services </li></ul><ul><li>Total Revenue and Marginal Revenue </li></ul>
  14. 14. Total Revenue <ul><li>The Number of Units sold…multiplied by the price per unit. </li></ul><ul><li>Sold 42 glasses of Lemonade, at $1.00 a pop… </li></ul><ul><li>Your total revenue is $42.00 </li></ul><ul><li>This number doesn’t include _________. </li></ul>
  15. 15. Marginal Revenue <ul><li>The change in total revenue from selling another “unit” </li></ul><ul><li>Reminds us of Marginal Cost which was…. the amount of money that it takes to produce one more “unit”. </li></ul>
  16. 16. Marginal BENEFIT <ul><li>Marginal Revenue - Marginal Cost = The Marginal Benefit </li></ul><ul><li>If we want to find the “Marginal Benefit” – we would look at the Cost-Benefit Analysis </li></ul>
  17. 17. Cost Benefit Analysis <ul><li>Weighing the Marginal BENEFITS against the Marginal COSTS…. </li></ul><ul><li>Helps us decide how much to produce…. </li></ul><ul><li>If the COSTS outweigh the BENEFITS…we lose money. </li></ul>
  18. 18. ACME Lemon Prices <ul><li>1 Lemon = .33 cents </li></ul><ul><li>10 lemons = $2.50 </li></ul><ul><li>20 lemons = $4.00 </li></ul><ul><li>40 Lemons = $6.00 </li></ul><ul><li>How does this explain Marginal Cost? </li></ul>
  19. 19. Lets say you bought a case of 40 lemons <ul><li>You got a lemon for 15 cents… add 3 cents worth of sugar…a 10 cent cup…and free water…. 28 Cents. </li></ul><ul><li>Sold for a dollar. </li></ul><ul><li>Profit? 72 cents. Not bad. </li></ul>
  20. 20. Lets say a 41 st customer walked up… <ul><li>You don’t have any more supplies….. </li></ul>
  21. 21. ACME <ul><li>You run to the Acme….buy a lemon for 33 cents. </li></ul>
  22. 22. WaWa <ul><li>Run into wawa and buy a cup of ice for 75 cents </li></ul>
  23. 23. Dunkin Donuts <ul><li>They won’t give you any sugar for free, so you need to buy 2 sugar packets for 15 cents. </li></ul>
  24. 24. So your 41 st Lemonade cost: <ul><li>$. 33 lemon </li></ul><ul><li>$. 75 cup/ice </li></ul><ul><li>+ $. 15 sugar </li></ul><ul><li>$1.23 (Marginal Cost) </li></ul><ul><li>you sold it for $1.00 </li></ul>
  25. 25. <ul><li>Lost 23 cents </li></ul><ul><li>It wasn’t worth making one more “unit” </li></ul><ul><li>(Marginal Benefit was -23) </li></ul>
  26. 26. <ul><li>After doing a Cost Benefit Analysis for our Lemonade Stand – we found out that Our Marginal COST did not outweigh the Marginal Benefits….therefore…. </li></ul><ul><li>We should have turned away the 41 st customer. </li></ul>
  27. 27. What NEXT? <ul><li>What are some ways we could increase our profit? </li></ul><ul><li>What are some ways we could increase our production? </li></ul><ul><li>What are some ways we could decrease our Costs? </li></ul>
  28. 28. Average Customers (by hour) June 2008 <ul><li>9:00 – 10:00 - 5 </li></ul><ul><li>10:00 – 11:00 - 6 </li></ul><ul><li>11:00 – 12:00 - 16 </li></ul><ul><li>12:00 – 1:00 - 32 </li></ul><ul><li>1:00 – 2:00 - 14 </li></ul><ul><li>2:00 – 3:00 - 18 </li></ul><ul><li>3:00 – 4:00 – 6 </li></ul><ul><li>4:00 – 5:00 - 2 </li></ul>

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