Figure 16-3 and Figure 16-4 demonstrated, along with Table 15-1 from which
the figures were derived, that the profit maximizing level of output is that level
of output where the slope of the total revenue curve, marginal revenue (MR)
is equal to the slope of the total cost curve, marginal cost (MC).
this is where the vertical distance between the TR curve and the TC curve, or
profit, is the greatest.
Figure 17-1 shows the MC and MR curves from Figure 16-2.
Note that on
Figure 16-2, the MC curve crosses the MR curve at a level of output of 7
ounces per week.
FOR ANY TYPE OF FIRM, THE PROFIT MAXIMIZING LEVEL OF OUTPUT
FOR THE FIRM IS WHERE MARGINAL COST IS EQUAL TO MARGINAL
Look at the different possible levels of output.
Ounces 1 through 6, inclusive,
all bring in more revenue to the firm (MR) than they each cost to produce
We should produce these units as we make a profit on each.
if we produce ounces 8 through 12, inclusive, each ounce produced costs us
more to produce than it brings in as revenue to the firm.
We should not
produce these units as we take a loss on each.
When MC = MR we make the
Figure 17-2 puts it all together.
Note that MC = MR at or near 7 ounces of
gold produced per week.
When the price of gold is $600 per ounce, MR is
TR is P X Q, or $600 X 7 = $4,200 per week.
The MC of the 7th ounce
of gold is $590.
We should produce the 7th ounce of gold.
We make $10
profit on it.
At 7 ounces of gold produced per week, ATC is $428.57 per
(This number, as all numbers, is from our empirically derived Table 15-
TC = $428.57 X 7 = $3,000 per week.
Since MC can initially start out above MR, and cut MR when MC is falling, and then cut MR again later
when MC is rising, to be perfectly precise, the rule is
the profit maximizing level of output for the firm is where
rising marginal cost is equal to marginal revenue.
Remember, if ATC is defined as TC / Q, then if we have Q and ATC, as we do in this graph, then TC = ATC
Note carefully the relationship between this graph and Table 15-1.
The ATC of 1 oz = $810.
and MC of 1 oz = $240.
The ATC of 7 oz = $428.57.
The AVC of 7 oz = $347.14.
The vertical distance
between ATC and AVC at any level of output is AFC.