The assumed goal of a private enterprise is to maximize PROFITs. Simply measured, profits are the difference between total revenue and total cost at any level of output. However, determining the profit-maximizing level of output is not that easy and requires a manager to first estimate COSTS. Costs are categorized as either fixed costs (those that do not change within a range of output) or variable costs (those that do change with the level of output). Costs can also include both accounting costs and economic costs. Accounting costs include all the payments a business owner makes for RESOURCES. Literally, accounting costs are costs for which the business has a payment receipt. In addition to accounting costs, many firms—particularly small, family-owned enterprises—often have OPPORTUNITY COSTs, which are the value of owner resources used in the PRODUCTION of goods and SERVICES. Opportunity costs are estimated as the highest valued alternative forgone by the resource owner and can include the value of owner labor, natural resources, or CAPITAL resources. Accounting costs plus opportunity costs equals economic costs. To compute profits, a manager must also estimate the price at which he or she can sell the output. Estimating price can be a difficult task. Depending on whether the firm is a small or large part of a large market (see MARKET STRUCTURE), the firm’s actions can affect the market price, and its impact on price will depend on the ELASTICITY OF DEMAND for its PRODUCT. The firm may also use a variety of PRICING STRATEGIES, including selling the same product at different prices in different markets. It is important to recognize that the firm is “estimating” price. Often in the time between when a manager decides to produce a product and when it is ready for sale in the market, prices change. Assuming a manager can estimate both costs and price, profit maximization is achieved at the level of output in which the marginal (extra) revenue from producing and selling one more unit of output equals or just exceeds the marginal (extra) cost of producing that unit of output. This is known as the first condition of the SUPPLY rule: A firm will always maximize profits or minimize losses at the level of output where marginal revenue equals marginal cost. To determine whether the firm is making a profit at the supply rule–dictated level of output, a manager compares average cost (cost per unit) with price. If price is greater than or equal to average cost, the firm is at least breaking even. If price is less than average cost but greater than average variable cost per unit, the firm is “covering its variable costs” (usually labor and materials) but not covering all costs. If price were less than average variable cost, the firm would be better off (lose less money) by terminating production. That output level where price is less than average variable cost is known as the shutdown point. The first part of the profit maximization process is to consider the output in which marginal revenue equals marginal costs. To decide whether or not to produce at that level, a manager compares price to average cost and average variable cost. If price is less than average variable cost, shut down; if price equals or exceeds average cost, produce that level of output. If price is between average cost and average variable cost, managers will need to consider their options and review their credit. Most businesspeople are optimists and believe in their product. To stay in business when it is not breaking even, a firm will need financial capital to pay for the shortfall between total revenue and total costs. A major cause of small-firm BUSINESS FAILURE is the lack of capital to cover initial losses until it can get established. To improve their profit situation, managers will look to see if they can reduce costs or increase revenues, leading to reconsideration of the rules for profit maximization.