Review Costs

Review Costs - Review Costs Review of the economic...

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Review Costs Review of the economic relationship between total profit and revenues and cost Accounting profit Total profit = total revenues- total costs Total revenue o Refers o the money a firm received from its sales o Depends on 2 factors the price you decide to charge and the quantity you can sell at that price o To be profitable a firm must maximize its revenue Higher prices of products doesn’t necessarily mean greater profit, you to look at the cost of production Total Cost o Refers to the money the firm spends to purchase the productive resources it needs to produce its good or service o Total Cost = Total Fixed Costs + Total Variable Costs Economists analyze production decisions of firms they divide costs into 2 basic categories: o Fixed Costs Are those that remain the same at all levels of output they must be whether tor not the firm produces Fixed costs are difficult to adjust in the short term Often referred to as overhead costs Ex. Bakery must pay off the loan for new gas ovens no matter how many sales the company makes. o Variable Costs Change with the level of production As production increases it becomes necessary to employ more resources (labour and raw materials) these costs increase with increase in production Ex. If the bakery has increased gas bill with increased production may choose to decrease another variable such as laying off a part- time worker After both revenue and costs have been determined you can calculate profits Economists consider two different time frames: o Short Run Is a time period over which the firms maximum capacity is fixed because of a shortage of at least one resource Ex. Assume a printing company has purchased enough paper to run its printing press at 80% capacity and get a new contract that
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This note was uploaded on 02/05/2011 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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Review Costs - Review Costs Review of the economic...

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