o You can find the profit maximization by comparing the marginal revenue and marginal cost from each unit produced. o The fifth and sixth columns in Table 2 compute marginal revenue and marginal cost from the changes in total revenue and total cost, and the last column shows the change in profit for each additional gallon produced. o If marginal revenue is less than marginal cost, like 6,7, or 8 gallons, Vacas should decrease production. The Marginal-Cost and the Firm’s Supply Decision Profit Maximization for a Competitive Firm (Pg. 284)
[Figure.1] This figure shows the marginal-cost curve (MC) , the average-total-cost curve (ATC) , and the average-variable-cost curve (AVC) . It also shows the market price (P), which equals marginal revenue (MR) and average revenue (AR) . At the quantity Q1 , marginal revenue MR1 exceeds marginal cost MC1 , so raising production increases profit. At the quantity Q2 , marginal cost MC2 is above marginal revenue MR2 , so reducing production increase profit-maximizing quantity Q max is found where the horizontal price line intersects the marginal-cost curve. ● Regardless of whether the firm begins with production as a low level (such as Q1) or at a high level (such as Q2,) the firm will eventually adjust production until the quantity produced reaches Qmax. This analysis yields three general rules for profit maximization: 1. If marginal revenue is greater than marginal cost, the firm should increase its output. 2. If marginal cost is greater than marginal revenue, the firm should decrease its output, 3. At the profit-maximizing level of output, the marginal revenue and marginal cost are exactly equal. Marginal Cost as the Competitive Firm’s Supply Curve (Pg. 285) [Figure.2] An increase in the price from P1 to P2 leads to an increase in the firm’s profit-maximizing quantity from Q1 to Q2. Because the marginal-cost curve shows the quantity supplied by the firm as any given price, it is the firm’s supply curve. ● When the prices is P1, the firm produces quantity Q1, the quantity that equates marginal cost to the price. ● When the price is P2, the firm finds that marginal revenue is now higher than marginal cost at the previous level of output, so the firm increases production. ● The new profit-maximizing quantity is Q2, at which marginal cost equals the new higher price. **b/c the firm’s marginal-cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal-cost curve is also the competitive firm’s supply curve.
The Firm’s Short-Run Decision to Shut Down Shutdown: refers to a short-run decision not to produce anything during a specific period of time b/c of current market conditions. ● Short-run and long-run differ b/c most firms cannot avoid their fixed costs in the short run but can do so in the long run.
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