The profit margin (or price differential) is the difference between the sales price of a good or service and the cost. It is often expressed as a percentage of the cost. A markup is added to the total cost incurred by the producer of a good or service to cover the costs of doing business and generating profits. Total cost reflects the total amount of fixed and variable expenses to produce and distribute a product.[1]​ Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.[2][3]​ Retail markup is commonly calculated as the difference between the wholesale price and the retail price, as a percentage of the wholesale price. Other methods are also used.

Profit

Assume: selling price is 2500, product cost is 2000.

Profit = Sale price - Cost[4]​.

500 = 2500 – 2000.

Profit Margin

Below is the profit margin as a percentage of cost added to cost to create a new total (i.e. cost plus).

Another method of calculating markup is based on the cost percentage. This method eliminates the previous two-step process and incorporates discount pricing capability.

Comparing the two methods of discounting:.

These examples show the difference between adding a percentage of a number to a number and asking what number this number is X%. If the markup has to include more than just profits, such as overhead, it can be included as such:.

either.

Added supply margin

P = (1 + μ) W. Where μ is the margin on costs. This is the pricing equation.

W = F (u, z) Pe. This is the wage setting relationship. u is unemployment that negatively affects wages and z the variable capture all positively affects wages.

P = Pe (1 + μ) F (u, z). This is the aggregate supply curve. Where the price is determined by the expected price, unemployment and z capture all variables.