Economics for Kids: Learn About Profit and Loss
Making a Profit
Imagine a boy named Tom. He wanted to buy a new toy. He decided to set up a lemonade stand to make some money. To make money, he had to make a profit on the sale of the lemonade. To understand what it means to make a profit, you need to learn about costs or expenses first.
What did Tom need to make lemonade? Obviously he needed lemons and sugar. He took money out of his piggy bank to buy the lemons and sugar he needed to make lemonade. He spent $5 to get them. This was a cost or expense.
He also wanted a big sign to put in front of his lemonade stand. He paid $1 for the poster paper. That was another cost. So, his total costs were $6.
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Tom set up his lemonade stand and sold a lot of lemonade. He earned $14 altogether. But he really only made $8. This is his profit. You may be wondering why. Remember that Tom spent $6 on lemons, sugar and poster paper? The profit is the amount of extra money Tom made.
So, he made $14 but he had to actually spend $6 first. Tom started out with $6 in his piggy bank. After his lemonade sale he now has $14 in his piggy bank. So, he has $8 more after the lemonade sale.
What is a Loss?
Imagine now that Tom spent $6 to buy the things he needed for his lemonade stand but he only sold $5 worth of lemonade. He lost $1. His expenses or costs were higher than his lemonade sales. He took $6 out of his piggy bank but was only able to put $5 back. This is known as a loss.
Sometimes businesses make extra money, known as a profit. But sometimes they lose money, known as a loss.
Cost of Goods Sold - this is the amount you paid for the things you sell. In the example with Tom, the money he spent on lemons, sugar and poster paper was the cost of the goods he sold
Total Sales - this is the amount he made selling his lemonade to customers
Gross Profit - this is Total sales minus Cost of Goods Sold
Operating Expenses - many business have to pay for rent, electricity, salaries, office supplies and many other things. Let's say in our example that Tom paid a friend $1 to help with the lemonade stand.
Net Profit/Net Loss - Gross Profit minus Operating Expenses
Unit Cost - the amount you paid for each item you sell
Let's look at the example with Tom.
Cost of Goods Sold - Tom spent $6 buying lemons, sugar and poster paper
Total Sales - he sold $14 worth of lemonade
Gross Profit - this is total sales ($14) minus cost of goods sold ($6). Tom's gross profit is $8
Operating Expenses - Tom paid a friend $1 to help run the lemonade stand. So $1 is his operating expense
Net Profit/Net Loss - Gross profit ($8) minus operating costs ($1). Tom's gross profit is $7
Unit Cost - if Tom sold 50 cups of lemonade and his total cost was $6, then his unit cost would be $6 divided by 50, which is equal to 12 cents. So his unit cost is 12 cents