Notes on formulas:

Total Revenue or total sales: TR P Q = . Where TR is the total revenue, P is the price charged
and Q is the volume/quantity sold.
Total cost: TC F TVC F MC Q = + = + . Here TC is total cost, F is total fixed cost, TVC is the total
variable cost. In general we can also write total variable cost as: TVC MC Q = . Here MC is the
marginal cost of production, Q is the quantity sold. Note that in this setup of cost function, MC
is equal to average variable cost of production. For a reasonable approximation this is a very
good setup.
Marginal cost:
( )
( )
1 2
1 2
TC TC
MC
Q Q

. Where TC
1
and TC
2
are the total cost for the output level of Q
1

and Q
2
.
Marginal revenue:
( )
( )
2
1 2
TR TR
MC
Q Q

. Where TR
1
and TR
2
are the total cost for the sales level of
Q
1
and Q
2
.
To maximize profit we need to find the point where marginal revenue is equal to profit. Note
that if MR > MC then one unit increase in output will lead to larger increase in revenue than in
cost. So, you will increase output. On the other hand, if MR < MC then one unit increase in
output will lead to larger increase in cost than in revenue. So, you will decrease output. So,
when profit maximized then MR = MC.
Average revenue:
TR
AR
Q
=
Average cost:
TC
AC
Q
=
Average fixed cost:
F
AFC
Q
=
Average variable cost:
TVC MC Q
AVC MC
Q Q

= = =
Breakeven quantity: At breakeven point firm makes zero profit.
( )
0
0
TR TC
P Q F MC Q
Q P MC F
F
Q
P MC
=
=
=
=

Note that breakeven point is used a rule of thumb to make investment decision. But as you
know by now this is not a good investment strategy.
Breakeven price (BP):
1. Before the investment is made, breakeven price is BP AFC AVC = + . Note at this price
firm will recover all the cost
2. After the investment is made, recoverable cost is the variable cost. So, BP AVC =

Elasticity measures:
Price elasticity of demand: suppose there is a product x, then demand elasticity formula for x is:
( )
( )
( )
( )
( )
( )
( )
( )
1 2
1 2 1 2
1 2
1 2
1 2 1 2
1 2
2
2
x x
x x x x
x x
x
x x
x x x x
x x
Q Q
Q Q Q Q
Q Q
P P
P P P P
P P
c
(
(

(
(
( | + |
(
( |
+
( \ .
= =
( (
( (
+
(
(
| + |
(
|
( \ .
. Here P
x1
and P
x2
are the price points and Q
x1
and Q
x2
are
corresponding demand for the product. Note that in this case, we are measuring the impact of
1% price change on the percentage change in the demand for product x. This measure is also
known as own price elasticity.

Price cost margin and profit maximizayion: Price cost margin formula for a single product
market (x) is
1
x x
x x
P MC
P c

= where
x
c is the price elasticity of demand.
Disclaimer: Formulas in general tend to provide us approximations of what can be expected.
So, you need to be careful how you use them. Judicious use of formulas in everyday business
decisions will make you a great manager.