Chapter 5 Section 3: Cost Revenue and Profit Maximization

total cost

the sum of fixed costs and variable costs

total revenue

total amount earned by a firm from the sale of its products

If the total output of a business increases, what will happen to fixed costs? To variable costs?

Average fixed costs must fall continuously as output increases because total fixed costs are being spread over a higher level of production.

How do we find the profit-maximizing quantity of output?

The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output.

overhead

broad category of fixed costs that includes interest, rent, taxes, and executive salaries

fixed cost

costs that remain the same regardless of level of production or services offered

marginal analysis

decision making that compares the extra cost of doing something to the extra benefits gained

e-commerce

electronic business conducted over the internet

marginal cost

extra cost of producing one additional unit of production

marginal revenue

extra revenue from the sale of one additional unit of output

profit-maximizing quantity of output

level of production where marginal cost is equal to marginal revenue

variable costs

production costs that change when production levels change

break-even point

production level where total cost equals total revenue

What is the difference between break-even output and profit-maximizing quantity of output?

The break-even point only tells the firm how much it has to produce to cover its costs. Profit-maximizing quantity of output occurs when other levels of output may generate equal profits, but none will be more profitable.

Many plants use several shifts of workers in order to operate 24 hours a day. How do a plant's fixed and variable costs affect its decision to operate around the clock?

Working around the clock also makes the plant more money by simply supplying more products; this makes the production more smooth and efficient.