M3 COSTS AND PROFIT

• Revenue - the amount that One receives for the sale of his/her output.
• Costs - they are what you give up to get something.
• Explicit Costs - are input costs that require an outlay of money by the firm (out-of-pocket money).
• Implicit Costs - are input costs that do not require an outlay of money by the firm.
• Economists - are interested in studying how firms make production and pricing decisions. Because these decisions are based on both explicit and implicit costs, economists include both when measuring a firm’s costs.
• Accountants - keep track of the money that flows into and out of firms. As a result, they measure the explicit costs but often ignore the implicit

  costs.
• Fixed Costs - are expenses that does not change in proportion to the activity of a business. (e.g. rent, insurance-premium, interests), and also direct costs such as payroll (particularly salaries).
• Variable Costs - change in direct proportion to the activity of a business such as sales or production volume. In retail, the cost of goods is almost entirely variable. (e.g. direct material costs, wages, fuel)
• Ultimate Goal of any Business - to maximize profits.
• Profit Maximization - occurs at the point where marginal revenue equals marginal cost.
• Revenue = Price x Quantity Sold