Final answer:
In business, the relationship between price, product, and profit is crucial. The cost of production and the desired profit determine the price of a product, and businesses calculate profits by comparing total revenue to total cost.
Step-by-step explanation:
In business, the relationship between price, product, and profit is crucial. The price of a product is determined by considering the cost of production and the desired profit. If the cost of production increases, the price of the product will also need to increase in order to maintain the desired profit margin.
For example, if a company manufactures a product that costs $10 to produce and wants to make a 20% profit, they would set the price at $12 (($10 + 20%($10)) = $12). This equation ensures that the cost of production and the desired profit are equal to the price.
In terms of profitability, businesses calculate profits by comparing the total revenue generated from sales to the total cost of production. To determine the price at which a firm should continue producing in the short run, they analyze the average cost curve and evaluate patterns of costs to determine potential profit.