Blog 4

Hi all,

Professor Little is out, so I am your substitute.  Today I am going to teach you about profit and revenue functions.

Company A produces hockey sticks and they sell hockey sticks for $100
In the first year their costs are $80, but then due to the costs of delivering the sticks to the store, the cost of selling the stick goes down.  Why?

There are a couple of things we have to learn about first

Fixed Costs: Costs that businesses have to pay (e.g. rent, water and electricity, internet, etc.)
Marginal Costs:  How much money it takes to produce an extra unit of your product (in this case hockey sticks)
Variable Costs:  How much money the materials will be and how many sticks you are producing (e.g. carbon fiber)



So your revenue function is R(x) =100x
and your profit function is: P(x) = C(x) - R(x)
Your cost function is C(q) = x + y * q (q being the quantity), x = fixed costs, y = # of units produced



The difference in profit can be seen by the graph below. The red line is how much the sticks are sold for - this is revenue. It stays the same - the company is happy with a profit of $20 per stick and revenue of $100. They don't feel the need to raise the stick price in 2013, because that could potentially lower profits if less people buy the sticks.
Once the fuel costs go down, the profit goes up because the company does not need to pay as much to deliver the sticks to the stores. The profit is now $32, but the revenue is still $100.
In July 2015, the profit is the revenue minus the cost: 100 - 68 =$32. This shows the effect that outside costs can have on a business.
It is important to know that this could go the other way too, and cause business' to suffer.