Businesses need to understand their costs of production including total costs, average total cost, marginal cost, total revenue, and marginal revenue. Total costs are the sum of fixed and variable costs. Average total cost is total cost divided by units produced. Marginal cost is the change in total cost from producing one additional unit. Total revenue comes from selling units at a price. Marginal revenue is the change in total revenue from one additional unit sold. Firms should produce where marginal revenue is greater than or equal to marginal cost and stop where marginal revenue is less than marginal cost to maximize profit.

1. Business Costs and
Revenues
Course: MBA-1
Subject: ME
Unit:2.1

2. Businesses need to know their total costs
• Total Costs = Fixed Costs + Variable Costs
Fixed Costs = Costs that don’t change based on production.
example: rent
Variable Costs = Costs that change with rate of production
example: cost of raw materials

3. They may also want to know, on average, how
much each unit of the good costs them to produce
• Average total cost is determined by
dividing the total costs by the number of
goods produced
• (also, per-unit cost)
If total cost is $1,000.00 and we produce 100, then
average total cost is $10.00

4. Firms also want to know the marginal cost
Should we produce more?
• Marginal cost is the additional cost of
producing each additional good.
– In economics, marginal = additional
• It’s determined by dividing the change in
total cost by the change in quantity.
ΔTC ÷ ΔQ

5. Businesses want to know total revenue
• Total revenue is the price of the good
times the number of the good sold.

6. Businesses also want to know marginal revenue
Is it profitable to produce more?
• Marginal revenue is the additional revenue
from selling each additional unit of the
good.
• It’s determined by dividing the change in
total revenue by the change in quantity
sold.
Δ R ÷ Δ QSold

7. “ How much should we produce?”
• As long as marginal revenue is greater
than or equal to marginal cost, a firm will
continue to produce. MR ≥ MC
• If marginal revenue is less than marginal
cost, a firm will not produce.
MR < MC

8. “Are we making money?”
Is there a profit?
• To compute profit , subtract total cost
from total revenue
TR – TC = Profit