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Understanding Profit and its Components

Understanding Profit and its Components

Understanding Profit and its Components

Profit is the difference between revenue and cost, where revenue is the selling price times the number of items sold, and cost is the sum of wages paid to inputs of the production process and it includes fixed cost. Businesses maximize profits by increasing revenue or reducing cost, or doing both. Thus, it is important to understand the components of profit: revenue and cost as well as their subcomponents. The production function for a firm is a technological relationship between inputs, such as capital, labor and materials; it determines the level and quality of outputs. Many production functions, however, lack best available technologies (BAT) and are unable to optimize output.

Ellis

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