Total revenue is the total amount earned from sales and is calculated as price times quantity sold. Marginal revenue is the change in total revenue from selling one more unit. There are two types of costs - fixed costs that do not change with output like rent, and variable costs that do change like labor. Total cost is the sum of fixed and variable costs. Marginal cost is the change in total cost from producing one more unit. Businesses aim to produce at the quantity where marginal cost equals marginal revenue to maximize profit, which is total revenue minus total cost. E-commerce firms have lower fixed costs than traditional stores since they do not need physical retail space or large inventories.

1. Chapter 5.2 & 5.3
Cost, Revenue and
Profit
LINDQUIST - ECONOMICS

2. Total Revenue
Total amount earned by a firm from the
sale of its products
Total Revenue = price times output
Price x Amount of units sold
Marginal Revenue =Extra revenue from
the sale of one additional unit of output.

3. Costs
Fixed costs (FC) –
Costs that stay the same
regardless of level of
production.
rent
property tax
insurance premiums

4. Costs
Fixed costs
Variable costs (VC) -
costs that change with output or
Production levels change
labor
Materials/INPUTS
capital goods

5. Costs
Fixed cost + Variable
cost = Total Cost (TC)

6. Costs
Marginal Costs (MC) =
cost of producing one more unit

7. E-Commerce Example
• Companies such as Amazon.com have
been able to offer a wide range of
products while keeping their overhead low.
• What helps e-commerce (Electronic
Businesses) firms to reduce cost?
– E-Comerce does not have to pay rent or keep
large inventories. Traditional stores have
MORE FIXED COSTS

8. Profit/Loss
Profit/Loss = Total Revenue
minus Total Cost (TR-TC)

9. So how do you know how to produce?
• How do businesses decide how many workers
to hire?
• How do they measure how many INPUTS to
use for MAXIMUM PRODUCTION??

10. Businesses Decisions
• Total Product: total output or production by a
firm
• Output: Stuff the business produces
• Inputs: Stuff that was necessary to produce
the output.
• Marginal Product: Extra output due to the
addition of one more unit of input

11. Stages of Production
• STAGE 1: INCREASING MARGINAL
RETURNS
– Specialization of labor
• STAGE 2: DECREASING or Diminishing
Marginal Returns
– Law of diminishing returns – Stage where
output increases at a decreasing rate
• STAGE 3: NEGATIVE MARGINAL
RETURNS
– Workers in the way