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Unformatted text preview: ue is $400,000, total cost is
$320,000, and profit is $80,000. Now suppose
it produces and sells an additional unit of a
good. The additional revenue from selling this
unit of the good (the marginal revenue) is
$40, and the additional cost of producing this
unit of the good (the marginal cost) is $10.
Total revenue will rise to $400,040 ($400,000
$40 $400,040), and total cost will rise to
$320,010 ($320,000 $10 $320,010). What
will happen to profit? It will increase to
$80,030 ($400,040 $320,010 $80,030).
Thus, whenever the firm produces and sells an
additional unit of a good and marginal revenue is greater than marginal cost, it is adding
more to its total revenue than to its total cost,
and therefore it is maximizing profit. How to Compute Profit
When a firm computes its profit or loss, it
determines total cost and total revenue and
then finds the difference:
1. To compute total cost (TC), add fixed
cost (FC) to variable cost (VC).
TC FC VC e buy things from stores every day. Some
of the businesses that own those stores
earn more (per square foot of space and per
store) than do others. Here is a list of wellknown businesses and the revenue that each
earns per store and per square foot of space.
Most of the dollar amounts are for 2003. W Revenue per
square foot Revenue
per store $379 $ 2,766,639 Nordstrom 319 37,112,273 Foot Locker 316 1,249,896 Wal-Mart 422 55,924,898 Target 278 32,942,045 Company
and Fitch Sports Chalet 241 8,816,037 Barnes & Noble 243 5,865,314 Borders 237 6,000,000 Sharper Image 627 2,509,051 Radio Shack 342 829,841 Walgreens 709 7,748,507 Home Depot 370 40,144,000 Krispy Kreme 859 3,952,000 McDonald’s 543 1,628,000 Domino’s Pizza 527 605,879 Starbucks Coffee 521 781,669 Source: BizStats.com. 2. To compute total revenue (TR), multiply the price of the good (P) times the
quantity of units (Q) of the good sold.
P Q TR 3. To compute profit (or loss), subtract
total cost (TC) from total revenue (TR).
Profit (or loss) TR TC Suppose variable cost is
$100 and fixed cost is $400. It follows that
total cost is $500. Now suppose that 100
units of a good are sold at $7 each; total revenue is then $700. If we subtract total cost
($500) from total revenue ($700), we are left
with a profit of $200.
EXAMPLE: Section 3 Revenue and Its Applications 179 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 180 How Many Workers Should
the Firm Hire?
Wal-Mart has more than 1 million
employees. In fact, it has somewhere closer
to 1.2 million employees. How does WalMart know how many employees to hire?
Did the president of the company simply
say one day, “1,199,278 employees sounds
like the right number of employees to me, so
let’s go with it”? We doubt it.
The fact is, every business has to decide
how many employees it will hire (just as we
learned that every business
“In the business world the
has to decide how much it
rearview mirror is always
will produce). Let’s begin the
clearer than the windshield.” story of how a firm decides
how many employees to hire
by first discussing the law of
diminishing marginal returns.
The name of this “economic law” sounds
worse than it is. (If yo...
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- Winter '14