Costs and Profit
Profit equals revenue minus costs.
About this topic
Profit equals total revenue minus total costs. Fixed costs such as rent and machinery do not change with output in the short run; variable costs such as materials and wages do. Total cost equals fixed plus variable. Average cost is total cost per unit, and marginal cost is the extra cost of producing one more unit.
Costs matter because they decide whether a business survives and how much it will produce. A firm maximises profit by producing until the marginal cost of one more unit equals the extra revenue it brings. Economists also count opportunity costs, such as the owner's own time, so economic profit can be lower than the profit in the accounts.
Example: a bakery pays 1,000 dollars monthly rent and equipment, plus 2 dollars of ingredients per loaf. At 500 loaves, total cost is 1,000 plus 1,000, so 2,000 dollars, and average cost is 4 dollars. If bread sells at 5 dollars, revenue is 2,500 and profit is 500. Making more loaves spreads the fixed cost, so average cost falls, an effect called economies of scale. Very large firms may eventually face diseconomies of scale.
Misconceptions: revenue is not profit, and a firm may keep running at a loss in the short run if revenue covers variable costs. Tip: always separate fixed from variable costs before calculating.
Key ideas
- Fixed vs variable costs
- Marginal cost
- Break-even point
Quick check
Use cases: where Costs and Profit helps
- Homework: review the key idea behind Costs and Profit before you start a problem set.
- Exam revision: use the quick check to test whether you can recall Costs and Profit without notes.
- Visual learning: play with the interactive lab to see how Costs and Profit changes when you adjust its inputs.
- Teaching a friend: explain Costs and Profit in your own words, then compare your version with the key ideas.
Economics explains prices, jobs, budgets and government policy in daily life.
Frequently asked questions
What is Costs and Profit?
Profit equals revenue minus costs.
What will I learn in Costs and Profit?
Fixed vs variable costs. Marginal cost. Break-even point.
Is Costs and Profit part of Economics & Money?
Yes. It is one of 30 Economics & Money topics on LearnViz HighSchoolEdu, with 3 key ideas, a live animation and a quick check.
Does the Costs and Profit lab work on a phone or tablet?
Yes. The animation resizes to fit your screen and supports touch, so you can drag, tap and slide with your finger.
How should I study Costs and Profit?
Read the summary and key ideas first, play with the interactive lab to see the idea in motion, then answer the quick check. If you get a question wrong, go back to the key idea it tests.
Do I need an account, and is my progress saved?
No account is needed. Marking a topic as learned is saved in your own browser, so it stays on that device and is not sent to a server.