What is Profit?

Profit = Total Revenue – Total Costs

•Total Revenue = Price x Quantity (P x Q)
•Total Costs has two parts

- Fixed costs are costs that do not vary due to output. (i.e. lease, most debt payments, etc.)

- Variable costs are costs that do vary with output. (i.e. electricity costs, transportation costs)
•Total Costs = Fixed Costs + Variable Costs (Q)


The Profit – Maximizing Quantity

•When the firm produces an additional unit there are additional revenues and additional costs

- Profit maximization is about comparing the additional revenue from selling an additional unit of output

- Marginal Revenue (MR) = the addition to total revenue from selling an additional unit of output

- Marginal Cost (MC) = the addition to total cost from producing an additional unit of output



Maximizing Profit

•Profits are maximized at the level of output where MR = MC

- If MR > MC, you are not profit-maximizing, producing more will add to your profit.

- If MR < MC, you are not profit-maximizing, producing less will add to your profit

- Therefore, you can only profit-maximize if MR = MC


The Shape of MR and MC

•For a firm in a competitive market, MR is constant and equal to Price because the firm can sell any quantity at the market price
•MC rises with production because it gets more costly to produce each additional unit (i.e. more equipment, more maintenance, etc.)




Maximizing Profit Explains Behavior




















Последнее изменение: вторник, 14 августа 2018, 10:18