Unlike all of the students in Mr. Stewart's first-period class, many Americans lack a basic understanding of economics in terms of revenue, economic cost, and profit. There are many people who believe that in order to have the best company, all you have to do is maximize revenue-- regardless of how much money you spend, you just want to make as much as possible. This, however, is not the case. In order for companies to succeed, their long-term goal must be maximizing profit. Profit is defined as revenue minus economic cost.
Revenue is the total amount of money that a company earns via sales. A general formula for revenue (for a specific product, many companies sell multiple products) is the number of goods sold multiplied by the price of each individual good. Two important terms to know when considering revenue are average revenue and marginal revenue. Average revenue is the revenue earned per unit sold, while marginal revenue is the additional revenue earned (or sometimes lost) from selling one additional unit of a good.
Economic cost is slightly more complicated, so we split it into two categories: explicit costs (or accounting costs) and implicit costs (or opportunity costs). Economic cost is the sum of implicit cost and explicit cost. Explicit cost is the cost that is paid directly to others in running your business: such as wages or rent cost. Explicit cost is sometimes called accounting cost because it is the cost that is accounted for on paper. Implicit cost is a cost that has already occurred but is not accounted for on paper. An example of implicit cost is the amount of hours that an owner allocates toward one task, rather than allocating those hours elsewhere. Likely, this sounds familiar-- it probably reminds you of opportunity costs. Thus, implicit cost is sometimes called opportunity cost.
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This post was very helpful to clear up my understanding of economic costs and how they are calculated. Previously, I would think that costs would solely be the amount of money you are spending to make the product. However, as shown in the post, economic cost includes both the accounting costs from making the product as well as the opportunity costs of mssing out on making something else. This post also helped me to clear up the difference between other important terms, such as profit and revenue.
ReplyDeleteI really enjoyed reading this post and gaining a more in-depth understanding of revenue and profit. I think it is really important, as you stated, to consider all costs when trying to run a business, making the difference between profit and revenue very important. I feel like a lot of people might mistake their revenue for their profit, so they believe they are making a lot more money than they are because they forget to include the costs of their products.
ReplyDeleteI enjoyed this post because it brought up some very valid points. Those who have not studied economics often don't understand these important concepts. This post did a great job of explaining the concepts clearly. Specifically economic cost, which is often what people overlook.
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