Revenue and Profits Total Revenue Total amount of

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Revenue and Profits

Revenue and Profits

Total Revenue • Total amount of money earned by a firm from selling goods

Total Revenue • Total amount of money earned by a firm from selling goods and services • Example: If Jessica sells 100 pairs of shoes at $50 each her total revenue is $5000

Marginal Revenue • Additional revenue earned from selling one more good or service

Marginal Revenue • Additional revenue earned from selling one more good or service

Cost Types • All costs can be separated into two categories • Explicit costs:

Cost Types • All costs can be separated into two categories • Explicit costs: costs that are paid out of pocket – Variable costs, Fixed Costs • Implicit costs: cost of forgone opportunities – Opportunity costs

 • Depending on type of cost being examined, profits can differ

• Depending on type of cost being examined, profits can differ

3 Types of Profits • Accounting Profit • Economic Profit • Normal Profit

3 Types of Profits • Accounting Profit • Economic Profit • Normal Profit

Accounting Profit • Profits earned by subtracting explicit costs from total revenue • Accounting

Accounting Profit • Profits earned by subtracting explicit costs from total revenue • Accounting Profit = TR – Explicit costs

Economic Profit • Profit calculated by subtracting both explicit AND implicit costs from total

Economic Profit • Profit calculated by subtracting both explicit AND implicit costs from total revenue • Economic profit = TR – implicit costs – explicit costs

Normal Profit • Minimum amount of profit a firm needs to survive • Found

Normal Profit • Minimum amount of profit a firm needs to survive • Found where TR = TC – Essentially a breakeven point for firms

Profit Maximization • Firms will maximize profits (or minimize losses) by producing where MC

Profit Maximization • Firms will maximize profits (or minimize losses) by producing where MC = MR • Producing before that point means potential unclaimed revenue • Producing after that point means losses

Example • Josie sold 1000 pairs of shoes for $100 each. • Her cost

Example • Josie sold 1000 pairs of shoes for $100 each. • Her cost of producing all 1000 pairs is $80 each. • What is her total revenue? • Did she make a profit?

 • What is her accounting profit? – TR: $100, 000 minus TC $80,

• What is her accounting profit? – TR: $100, 000 minus TC $80, 000 – Acct profit: $20, 000

 • Josie quit her job as a dancer to make shoes. • She

• Josie quit her job as a dancer to make shoes. • She earned $50, 000 as a dancer. • She also used part of her savings to start her business. She gave up the $2, 000 in interest she was earning.

 • What is her economic profit? • TR: $100, 000 – TC: $80,

• What is her economic profit? • TR: $100, 000 – TC: $80, 000 – OC: $52, 000 = $-32, 000

Did she make the right decision? • Josie’s accountant says YES because she made

Did she make the right decision? • Josie’s accountant says YES because she made $20, 000 in accounting profits • Josie’s economist friend says NO because she made $-32, 000 in economic losses • Who is right?

 • What is the normal profit Josie needs to earn to survive? •

• What is the normal profit Josie needs to earn to survive? • $80, 000 so she can pay all her total costs

 • Your firm is selling 10, 000 units of output at a price

• Your firm is selling 10, 000 units of output at a price of $10 per unit. • Your firm’s total explicit costs are $70, 000. • Your firm’s implicit costs of capital is $10, 000 and your opportunity cost is $20, 000.

 • Total Revenue: – $10 * 10, 000 = $100, 000 • Total

• Total Revenue: – $10 * 10, 000 = $100, 000 • Total implicit cost? – $20, 000 + $10, 000 = $30, 000 • Accounting profit – $100, 000 - $70, 000 = $30, 000 • Economic Profit? – $100, 000 - $70, 000 - $30, 000 = $0

 • Sally – IC: $35, 000 ($25, 000 + $10, 000) – EC:

• Sally – IC: $35, 000 ($25, 000 + $10, 000) – EC: $125, 000 – TR: $155, 000 – NP: $125, 000 – AP: $30, 000 ($155, 000 $125, 000) – EP: -$5, 000 ($155, 000 $125, 000 - $35, 000)