TOTAL REVENUE, TOTAL COST, AND PROFIT

We begin with the firm’s objective. To understand the decisions a firm makes, we must understand what it is trying to do. It is conceivable that Helen started her firm because of an altruistic-desire to provide the world with cookies or, perhaps, out of love for the cookie business. More likely, Helen started her business to make money. Economists normally assume that the goal of a firm is to maximize profit, and they find that this assumption works well in most cases.

What is a firm’s profit? The amount that the firm receives for the sale of its output (cookies) is called its total revenue. The amount that the firm pays to buy inputs (flour, sugar, workers, ovens, and so forth) is called its total cost. Helen gets to keep any revenue that is not needed to cover costs. Profit is a firm’s total revenue minus its total. cost.

Profit = Total revenue – Total cost.

To see how a firm goes about maximizing profit, we must consider fully how to measure its total revenue and its total cost. Total revenue is the easy part: It equals the quantity of output the firm produces  times the price at which it sells its output. If Helen produces 10,000 cookies and sells them at $2 a cookie, her total revenue is $20,000. By contrast, the measurement of a firm’s total cost is more subtle.

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