nlecture11 - profits

nlecture11 - profits - Topic 5: Production (3) Profit...

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opic 5: Production (3) Topic 5: Production (3) Profit maximization USC Marshall
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Profit maximization • Once the firm knows what is the minimum cost of producing any given quantity of output, the firm can then choose the output level that maximizes profits, which allows us to derive the supply curve • Profit, Π (Q), is simply the total revenue that the firm earns from selling its product minus the cost of production: Q TR Q TC Q USC Marshall
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Profit maximization TC(Q)? – Solution to the cost-minimization problem of the firm • Long-run and short-run TR(Q)? – The total revenue the firm gets from selling its output: P(Q)*Q Profit-maximizing output? MR(Q)=MC(Q) USC Marshall
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Profit maximization Marginal cost: – The cost of producing an extra unit of output – Slope of the total cost function Marginal revenue: – The additional revenue generated from selling an extra unit of output – Slope of the total revenue function TR Q P Q Q MR Q dTR Q dQ P Q dP Q Q USC Marshall
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Profit maximization Marginal revenue: •Ma rginal revenue: price received for the marginal unit minus the reduction in revenue earned on the inframarginal units because of the reduction in price needed to sell that marginal unit USC Marshall
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Profit maximization P P(Q*) Q Q* USC Marshall
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Profit maximization P P(Q*) P(Q*+ Δ Q) Q Q* Q*+ Δ Q USC Marshall
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Profit maximization P extra revenue from additional P(Q*) sales of Δ Q units P(Q*+ Δ Q) Q Q* Q*+ Δ Q USC Marshall
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Profit maximization loss in revenue on Q* units resulting from the P reduction in price needed to sell the extra Δ Q units extra revenue from additional P(Q*) sales of Δ Q units P(Q*+ Δ Q) Q Q* Q*+ Δ Q USC Marshall
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Profit maximization P For small changes in output, P(Q*) P(Q*+dQ) d(P(Q*)) MR= _______ dQ P(Q*)+ Q* (Q Q) Q Q* Q*+dQ USC Marshall
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Profit maximization Observations:
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This note was uploaded on 03/09/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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nlecture11 - profits - Topic 5: Production (3) Profit...

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