Unit 2 - Business Economics: Chapter 16: Business Costs, Revenues, and Profit

Business Costs, Revenues and Profit

Learning Objectives

• Understand how to define and calculate:

  • Total Revenue

  • Total Fixed Costs

  • Total Variable Costs

  • Total Costs

  • Average Total Costs

  • Profit

Getting Started

• Firms incur expenses called costs when producing goods and services.

• Economists classify these costs based on how they change with output levels.

• Some costs rise with output, while others remain constant.

Total Fixed Costs

• Costs: Expenses that must be met when setting up and running a business.

• Fixed Costs (Overheads): Costs that do not vary with the level of output.

• Examples: rent, business rates, advertising, insurance premiums, interest payments, and research and development costs.

• Fixed costs remain constant regardless of output but must be paid even if the firm produces nothing.

Frampton Training Example

• Provides training courses for HGV drivers.

• Total fixed costs: US$40,000$ p.a.

• Fixed costs stay the same at all levels of output.

Total Variable Costs

• Variable Costs: Costs that change when output levels change.

• Variable costs increase with higher production and decrease with lower production.

• Examples: raw materials, packaging, fuel, and labor.

• If a firm produces nothing, variable costs are zero.

• Total Variable Cost (TVC) = Variable Cost per Unit (VC) x Quantity (Q) $<br>$TVC = VC
  eq Q$</p></li></ul><h5 collapsed="false" seolevelmigrated="true">Frampton Training Example</h5><ul><li><p>Variable Costs: US$500$per course.</p></li><li><p>If 100 courses are provided:</p><ul><li><p>$TVC = 100
  eq US$500 = US$50,000$</p></li></ul></li><li><p>If 150 courses are provided:</p><ul><li><p>$TVC = 150
  eq US$500 = US$75,000$</p><p></p></li></ul></li></ul><h4 collapsed="false" seolevelmigrated="true">Total Costs</h4><ul><li><p><strong>Total Cost:</strong> Fixed Costs and Variable Costs added together.</p><ul><li><p>$TC = TFC + TVC$</p></li></ul></li></ul><h5 collapsed="false" seolevelmigrated="true">Frampton Training Example</h5><ul><li><p>If Frampton Training provides 100 training courses:</p><ul><li><p>$TC = US$40,000 + (100
  eq US$500)$</p></li><li><p>$TC = US$40,000 + US$50,000$</p></li><li><p>$TC = US$90,000$</p></li></ul></li><li><p>Total cost increases from US$90,000$to US$115,000$when the number of courses provided rises from 100 to 150.</p><p></p></li></ul><h4 collapsed="false" seolevelmigrated="true">Average Costs</h4><ul><li><p>The average cost of production is the cost of producing a single unit of output.</p><ul><li><p>$Average Cost = {Total Cost}{Quantity Produced}$</p></li><li><p>$AC = {TC}{Q}$</p></li></ul></li></ul><h5 collapsed="false" seolevelmigrated="true">Frampton Training Example</h5><ul><li><p>If 100 places were provided:</p><ul><li><p>$AC = {US$90,000}{100} = US$900$</p></li></ul></li><li><p>Each course costs Frampton Training US$900$.</p></li></ul><h5 collapsed="false" seolevelmigrated="true">Average Cost Curve</h5><ul><li><p>The average cost curve is U-shaped.</p></li><li><p>As output increases, average costs initially fall, reach a minimum, and then start to rise.</p><p></p></li></ul><h4 collapsed="false" seolevelmigrated="true">Total Revenue</h4><ul><li><p>The amount of money a firm receives from selling its output.</p><ul><li><p>$Total Revenue = Price
  eq Quantity$</p></li></ul></li></ul><h5 collapsed="false" seolevelmigrated="true">Frampton Training Example</h5><ul><li><p>Charges US$1500$for HGV training courses.</p></li><li><p>If 100 courses are sold:</p><ul><li><p>$Total Revenue = US$1500
  eq 100 = US$150,000$</p></li></ul></li><li><p>Frampton Training generated US$150,000$from providing 100 places.</p><p></p></li></ul><h4 collapsed="false" seolevelmigrated="true">Calculating Profit</h4><ul><li><p>Profit is the difference between total revenue and total costs.</p><ul><li><p>$Profit = Total Revenue - Total Costs$</p></li></ul></li></ul><h5 collapsed="false" seolevelmigrated="true">Frampton Training Example</h5><ul><li><p>Profit from providing 100 places:</p><ul><li><p>$Profit = US$150,000 - (US$40,000 + US$50,000)$</p></li><li><p>$Profit = US$150,000 - US$90,000$</p></li><li><p>$Profit = US$60,000$$