In a Free EnterpriseFree Enterprise system, there is an economic

incentive… and that is money!

Profit or Loss

For discussion…

• What is profit?

• What is loss?

• How does a business get profit…or loss?

4 important terms

1. Profit

2. Loss

3. Revenue

4. Costs– Total– Average

Refer to Chapter 2.2, pages 43-45 for additional informationRefer to Chapter 2.2, pages 43-45 for additional information

Revenue – the money a business takes in.

total revenue =

the price of the good x the number of the good sold

• Iggy’s Ice Cream Shoppe sells 1,000 ice cream cones at $2.00 a piece.

• Iggy’s total revenue is $2,000.00

1,000 x 2.00 = 2,000.001,000 x 2.00 = 2,000.00

Cost

• Total Cost = average cost of a good x the number of the good sold

Example: It costs Susan 60 cents to make a pair of socks (counting materials, labor, etc.) She makes 100 pairs of

socks.

.60 x 100 = 60.00

Her total cost is $60.00

Cost

• Average Cost = Total Cost / Quantity

Total Cost ($60.00) divided by quantity (100) = .60 cents

(average cost)

also: per-unit cost

Profit

• The amount of money left over after all the costs of production have been paid.

Profit = Total Revenue > Total Cost

(Consider: rent, wages, capital … monetary payments to resources… such as:

mortgage, energy, labor, advertising, materials, insurance, taxes and fees…etc.

Loss

• The amount of money by which costs are greater than revenue.

• Loss = Total Cost > Total Revenue

Another way to think about it…

• Total Revenue – Total Cost = profit or loss

• Positive number = profit

• Negative number = loss

Calculate

• Steve builds skateboards. He pays $20.00 for the deck, $40.00 for the wheels and $10.00 for the trucks. He pays Doris $5.00 to assemble a skateboard. He makes 100. What is his total cost?

• Steve sells 100 skateboards for $110.00. What is his total revenue?

• Profit or loss? How much?• Skateboards don’t sell. He discounts them to

$70.00 and sells all 100. Profit or loss?

Profits Attract Resources

Resources Move Away from Losses

• Please review the info in Chapter 2.2 as needed.

• Consider the documentary “Greed”– Answer Critical Thinking Question #5

See Exhibit 2.2 page 45See Exhibit 2.2 page 45

p. 45

• Many people think that a profit only benefits the person who makes it. In other words, there is no social good to profit. Do you agree or disagree? Explain your answer.