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Introduction

Microeconomics concerns individual and firm-level decisions regarding the allocation of resources. There are several important concepts to analyze a firm-level venture. We will just consider a single product firm for the sake of simplicity. At its most basic level, microeconomics considers at what volumes and prices it makes sense for a enterprise to continue producing a good or service. Hence it is quite important for decision-making.

Revenues, Costs and Profits

General Definitions

Revenue (R) is the amount of money a firm receives in payment for a product sold.

Costs (C) are how much money a firm pays to make a product.

Profit (P) is the amount left over when cost is subtracted from revenue:

\(P = R – C\)

For example, a pizza requires $5 of ingredients, labor and overhead to make. A pizzeria can cell that pizza for $12. The profit would then be $7:

\($7 = $12 – $5\).

The terms cost, revenue and profit are general terms, in that they can refer to one unit, lots of units or all units of product or service. For more realistic economic analysis we will need to be more specific.

Definitions for Totals

We will start by considering total cost, revenue and profit.

Total Revenue (TR) is the sum of revenues a firm receives in payment for all units of the product sold.

Total Cost (TC) is the sum of costs a firm pays to make all units of the product sold.

Total Profit (TP) is the sum of profits obtained from all goods sold:

\(TP = TR – TC\).

The pizzeria sells 100 pizzas each for $12, resulting in $1,200 in total revenue. The pizzas cost $5 to make, resulting in total costs of $500. Then the total profit would be $700:

\($700 = $1,200 – $500\).

 

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