Chapter 12 (1) Flashcards
Bottom Line
profit = the central goal of business
TRIPLE BOTTOM LINE
they value not only dollars but also social / environmental impacts
–> Still need profit to survive
Profit EQ
Profit = Total revenue – Total cost
TOTAL REVENUE
is the amount that a firm receives from the sale of goods and services
–>calculated as the quantity sold multiplied by the price paid for each unit
–> Total revenue = Quantity x Price = (Q1xP1) + (Q2xP2) + … + (QnxPn)
TOTAL COST
amount that a firm pays for inputs used to produce goods or services.
TOTAL COST EQ
Total costs = Fixed costs + Variable costs
–> Firm’s fixed cost = constant as quantity increases; variable cost rises w/ each additional unit produced
FIXED COSTS
are costs that do not depend on the quantity of output produced.
–>Can be a one-time, upfront payments before production can begin (e.g., like buying equipment)
–>Ongoing payments, like monthly rents.
VARIABLE COSTS
are those that depend on the quantity of output produced.
–>Includes raw materials as well as (many) labour costs
- -> if a firm = produces nothing–if it stops production–then its variable cost is zero (dependent)
- But it is still stuck w/ its fixed costs
2 components of a firm’s opportunity cost of operation
- composed of the fixed and variable costs (anything related to cost)
- composed of forgone opportunities
EXPLICIT COSTS
which require a firm to spend money
–> Example: rent on a building, labour, materials, and machines–all of these require the firm to pay someone else in order to acquire them
IMPLICIT COSTS
–opportunities that could have generated revenue if the firm had invested its resources in another way.
–> any input used in a business–warehouses, equipment, cash–could alternatively be used to generate income some other way
To properly account for the total costs incurred by a firm
total cost includes both types of costs (implicit & explicit).
When companies report their profits, they provide…?
accounting profits
ACCOUNTING PROFIT EQ
Accounting profit = Total revenue – Explicit costs
Economic profit EQ
Economic profit = Accounting profit – Implicit costs