Chapter 7

# Chapter 7 - • Marginal Revenue is the change in total...

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Chapter 7: How Firms Make Decisions The goal of a firm is to maximize its profits Profit is sales revenue minus costs of production Accounting Profit= Total Revenue – Accounting Costs Economics Profit = Total Revenue – All Costs (both explicit and implicit) The firm’s constraints o Demand curve facing the firm is a curve that indicates, for different prices, the quantity of output that customers will purchase from a particular firm. The maximum price the firm can charge to sell any given amount of output o Total Revenue, which is the total inflow of receipts from selling a given amount of output

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The cost constraint o For any level of output the firm might want to produce, it must pay the cost of the “least cost method” of production Production Function Prices of Inputs o Total cost- implicit and explicit costs The Profit-Maximizing Output level o Profit: Total Revenue (TR) – Total Cost (TC) o Loss: When TC > TR

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Unformatted text preview: • Marginal Revenue is the change in total revenue from producing one more unit of output. How much your revenue rises put unit increase in output. • Marginal Revenue (MR) = ∆ TR/ ∆ Q Using MR and MC to Maximize Profits • Increase output whenever MR>MC • Decrease output when MR < MC • Average costs (ATC, AVC, AFC) is irrelevant to profit maximization Dealing with Losses • Shutdown Rule: In the short run, the firm should continue to produce if total revenue exceeds total variable costs; otherwise, it should shut down • MR=MC, Q*; in the short run: o If TR>TVC- Keep producing o If TR<TVC- Shut down o If TR=TVC- indifferent between shutting down and producing • The Long Run: The Exit Decision o Exit is a permanent cessation of production when a firm leaves an industry o A firm should exit the industry in the long run when-at it best possible output level- it has any loss at all...
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## This note was uploaded on 02/04/2011 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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Chapter 7 - • Marginal Revenue is the change in total...

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