To calculate profit, a firm uses the following formula:
[tex]\[ \text{Profit} = \text{Total Revenue} - \text{Total Cost} \][/tex]
Here’s a step-by-step explanation:
1. Total Revenue (TR): This is the total amount of money a firm receives from selling its goods or services. It can be calculated by multiplying the price per unit by the number of units sold. Mathematically, it's expressed as:
[tex]\[ \text{Total Revenue} = \text{Price per Unit} \times \text{Quantity Sold} \][/tex]
2. Total Cost (TC): This includes all the costs a firm incurs in the production process. It’s the sum of both fixed costs (costs that do not change with the level of output) and variable costs (costs that vary directly with the level of output). Mathematically, it's expressed as:
[tex]\[ \text{Total Cost} = \text{Fixed Costs} + \text{Variable Costs} \][/tex]
3. Calculate Profit: The firm's profit is the difference between total revenue and total cost.
Given the question, the correct option is:
- Total revenue minus total cost
Thus, the firm calculates its profit using the total revenue minus total cost method.
